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-. 0800 144 551 @OrientBankUG CONTENTS

Corporate information 6 – 18 Report of the Directors 20 – 21 Statement of directors’ responsibilities 22 Report of the independent auditors 23 – 25

FINANCIAL STATEMENTS Consolidated and separate statements of profit or loss and other comprehensive income 26 Consolidated and separate statements of financial position 27

Consolidated statements of changes in equity 28 Separate statements of changes in equity 29 Consolidated and separate statements of cash flows 30

NOTES TO THE FINANCIAL STATEMENTS Notes to the Financial Statements 31 – 94

APPENDIX I Supplementary information to the annual report and consolidated and separate financial 95 – 99 statements

Annual Report and Consolidated Financial Statements 04 For the year ended 31 December 2017 Visa Infinite. et the reconition you desere

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-. 0800 144 551 rientan CORPORATE INFORMATION

DIRECTORS

Mr. Michael Cook Chairman British Mr. Ketan Morjaria Vice-Chairman Ugandan Mr. Hemen Shashikant Shah Non Executive Director American Mr. Francis M. Byaruhanga Non Executive Director Ugandan Mr. Joram Kahenano Non Executive Director Ugandan Mr. Zhong Shuang Quan Non Executive Director Chinese (Alternative: Mr. Jay Karia) Mr. Julius Kakeeto Managing Director Ugandan Ms. Darshana Bhatia Executive Director Indian

COMPANY SECRETARY Nicholas Ecimu c/o Sebalu & Lule Advocates Certified Public Secretaries () P. O. Box 2255,

COMPANY LAWYERS Shonubi Musoke & Company Advocates SM Chambers Plot 14, Hannington Road P. O. Box 3213, Kampala

AUDITOR

Deloitte & Touche Certified Public Accountants 3rd Floor, Rwenzori House, Plot 1, Lumumba Avenue P. O. Box 10314 Kampala

REGISTERED OFFICE Orient Plaza Plot 6/6A Kampala Road P. O. Box 3072 Kampala

Annual Report and Consolidated Financial Statements 06 For the year ended 31 December 2017 OUR BRANCH NETWORK OVERVIEW

Branches GOVERNANCE Branch Head Office/ Main Branch Muganzirwazza Plaza - Katwe Orient Plaza, Plot 6/6A Kampala Road Kampala P.O. Box 3072, Kampala

Kawempe Branch Plot 78 Bombo Road Acacia Branch Acacia Mall - Kisementi Kampala STATEMENTSFINANCIAL Kampala Kikuubo Branch Branch Grand Corner House Plot 12 Avenue Road Kampala Arua Municipality Kisekka Branch Ben Kiwanuka Branch Lohana Arcade, Nakivubo Road Haider Plaza - Ben Kiwanuka Street Kampala Kampala Branch Branch Nyonyi Gardens, Wampewo Avenue Mamerito House, Jinja Road, Kampala Bweyogerere Branch Town Branch Ham Shopping Mall, Makerere Hill Road Plot 29 Kampala Road Kampala Entebbe Branch Entebbe Airport Branch Plot 23 Naboa Road Entebbe International Airport Mbale Municipality Entebbe Mbarara Branch Garden City Branch Plot 73 High Street Garden City Mall - Yusuf Lule Road Mbarara Kampala Nkrumah Road Branch Branch Mirembe Arcade, Nasser Road Plot 15 Awere Road Kampala Gulu

Ntinda Branch Jinja Branch Capital Shoppers’ Mall Scindia Road Kampala Jinja

Kabalagala Branch William Street Branch Plot 1900 Road, William Street Kampala Kampala

www.orient-bank.com

Annual Report and Consolidated Financial Statements 07 For the year ended 31 December 2017 ABOUT US

Orient Bank is a leading private sector commercial Bank in Uganda. We began operations in 1993 and have grown steadily due to our professional management and prudent lending and investment policies.

Our Vision To be the pace setter and preferred financial partner for our stakeholders

Our Mission To deliver service that provides superior value to our customers

OUR VALUES We summarise our core values as SPIRIT

Service Resilience We provide service that is We are strong, determined and timely, helpful, friendly and adapt to the world around us convenient

Integrity We are honest, open and Passion straightforward with our We are enthusiastic and self colleagues, customers, motivated to excel in all that investors, regulators and we do community

Teamwork Innovation We are collaborative and We are open-minded and combine our collective constantly striving to improve knowledge and skills to our processes, platforms and outperform our competitors offerings

Annual Report and Consolidated Financial Statements 08 For the year ended 31 December 2017 OUR PRODUCT PORTFOLIO OVERVIEW

We are a customer focused bank and have developed tailor-made products to efficiently and effectively meet our customers needs. GOVERNANCE FINANCIAL STATEMENTSFINANCIAL

CURRENT ACCOUNTS SAVINGS ACCOUNTS ‚‚ Current Account (Personal & Business) ‚‚ Classic Saving Accounts ‚‚ SME Daily Account ‚‚ Dollar Savings Account (DOSA) ‚‚ Foreign Currency Account ‚‚ Future Children’s Savings Account (Personal & Business) ‚‚ CHAMA Investment Club Account ‚‚ Kyakala Account (Personal & Business) ‚‚ Diaspora Account ‚‚ Premium Account ‚‚ Target Savings Account ‚‚ Sapphire Account

RETAIL CREDIT TRADE FINANCE CORPORATE CREDIT ‚‚ SME Loans ‚‚ Letters of Credit ‚‚ Commercial Loans ‚‚ Guarantees/Bid Bonds ‚‚ Overdrafts ‚‚ Guarantees/Perfomance/Bid Bonds

OTHER SERVICES

We have considerable experience in the provision of customer payments and cash management services for big organizations both local and foreign which includes; INTERNATIONAL CURRENCY SERVICES ‚‚ Salary Processing ‚‚ Internal transfers ‚ ‚ Foreign Currency Accounts ‚‚ Safe custody ‚ ‚ Telegraphic Transfer ‚‚ Collections - (Bill Payments (URA taxes, , NWSC bills, KCCA ‚‚ Forex charges, NSSF )

Annual Report and Consolidated Financial Statements 09 For the year ended 31 December 2017 The Bank has revamped it’s business strategy with a strong emphasis on five key pillars; Performance, Service, People, Controls and Technology. With this strategy we expect to achieve accelerated growth in the years ahead.

Annual Report and Consolidated Financial Statements 10 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS 2.4% 2.4 Loans ratio remained low at remained Non-Performing billion 59 Revenue billion to Ugx 59 grew from Ugx 56 from grew Revenue grew from Ugx 57 billion to Ugx 59 from Revenue grew billion and, low at Non-Performing Loans ratio remained 2.4% Total assets grew from Ugx 554 billion to Ugx Ugx 554 billion to Ugx from assets grew Total 681 billion Ugx 251 billion to from Loans & advances grew Ugx 311 billion Ugx 423 billion to Ugx 555 from Deposits grew billion Loans & 311 311 billion advances grew from Ugx from grew Michael Cook of Directors Chairman Board ‚ ‚ ‚ ‚ ‚ 251 billion to Ugx ‚ ‚ ‚ ‚ ‚ Strategy into the Future recovery on premised positive is 2018 for outlook The conditions weather favourable credit, sector private in and an increase in Foreign Direct Bank Investment. The has revamped its strong business emphasis strategy on with five a keyService, People, Controls pillars;and With Technology. this Performance, strategy we expect to achieve accelerated growth in the years ahead. Conclusion I thank management and driving staff and delivering for on the their business strategy efforts and for in building a firm foundationalso thank for our Auditors, future Legal growth. Advisers And advice. and input and professional their I for Secretary Board as always I am grateful to my fellow Board members for their support and expertise. Happy Silver Jubilee Orient Bank. reducing the Rate from from Rate Bank Central the reducing Uganda of Bank to 9.5% by close of 2017. 12% at end of 2016 Financial Performance In spite of the difficult operating environment, Orient Bank managed to achieve significant growth across 2017. December ending year the in indicators key our Improved performance was particularly registered in the following areas; Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 CHAIRMAN’S STATEMENT 11 2018 is a special year for Orient Bank as we shall be Jubilee. celebrating our Silver On 15th March 1993, the Bank to the opened public its for doors the first time withat Uganda our first branch House. Our second opened in branch Jinja was and more soon recently Mbarara Branch became our 22nd branch. significantly. grown has Bank the years 25 last the Over Our customer deposits at the end of UGX 1994 were 3.5 billion, our loans and advances UGX 354 million and our profit before tax UGX 245Today million. as were deposits customer our 2017, December 31st at UGX 423 billion, our loans and advances UGX 250 billion. UGX 6.9 billion and our profit the without possible been have not could growth This support of you We our customers who have stood times. by us tough and good both in years the throughout appreciate your loyalty and as we celebrate 25 years of banking excellence, we renew our commitment to serve you even better in the years ahead. support their for Uganda of Bank regulator, our thank I and partnership over the years. strict Your guidance which we have done our best to follow has ensured Orient Bank stands here today strong to the years ahead. and forward looking I also thank our staff,dedicated service to the Bank over the last past25 years. and present, Each for their one of you has contributed in no small way to the success of this Bank and I Service, Passion, Innovation, Resilience, Integrity and thank you for your Teamwork. In regards to Uganda’s economic 2017, performance the economy in grew sluggishly with There 2016. in 2.5% from 2017 in 4.0% to real up growth GDP annual with trend inflationary downward overall an was headline inflation reducing from 5.7% in December 2016 to 3.0 % in December 2017 and core inflation reducing from 5.9% to 3.3% over the same period. The continued was drop in part due to the stability of larger the for prices food lower and rate exchange the inflationary dampened the of Because year. the of part with policy monetary in easing an was there pressures We invested in revamping the ATM network with automatic cash depositors and US Dollar cash dispensing. This has allowed our customers the convenience of accessing and depositing cash on their accounts in both US Dollars and Uganda shillings

Annual Report and Consolidated Financial Statements 12 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS 7% Total income Total grew by 7.7 %. grew billion deposits Customer 23% registered a growth a growth registered of 23% to UGX 555 Marketing Human Resource management, operations and financial planning. Assets 680 billion 18% growth to UGX growth ‚ ‚ Julius Kakeeto Managing Director/CEO ‚ ‚ Every participating business developed a business growth plan and the best will receive funding of up to UGX 30 million. The academy is run in partnership University Business School. with Makerere Focus for 2018 2018 will mark a Bank as significant it will be milestone celebrating 25 years for of operation in Uganda. Orient We will continue enhancing banking the platforms in Bank’s order electronic to grow our self-service channels and improve on customer experience. Our Point of Sale network and as ATM well as Xpresspay Pay cards. will be enabled to accept China Union We will launch a Mobile Banking application that will banking of range wide a access customers our enable services on their phones. We shall also be expanding our branch network to Mbarara and Nakivubo. Conclusion I would like to take customers this opportunity to for thank our the the guidance, the partnership, management work. colleagues for your dedication and hard team the and all Board my for Congratulations Orient Bank on the Silver Jubilee. registered an 18% registered Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 MANAGING CEO’S DIRECTOR/ STATEMENT Book-keeping Competitive market analysis The Entrepreneurial mind-set The Entrepreneurial 13 ‚ ‚ ‚ ‚ ‚ ‚ Introduction Introduction It gives me great pleasure financial to report for present thecustomer in to year growth its with continued ended you Bank The 2017. the 31st December to 18% of growth Assets into resulted which volumes UGX 680 billion and Deposit growth of 23% to UGX in 555 Loans billion. growth The Bank also registered and Advances by 19% to UGX 311 billion. Despite the positive growth on most of the metrics, profitability dropped by 20% to UGX 4.8 billion as a result of increased interest expense on deposits and for doubtful debts. provision Overview of Achievements in 2017 We to companies launched local allows that product a “Xpresspay”, the receive online payments Orient from customers across the credit or debit MasterCard and VISA their using world Payment Gateway currency local both in settled transactions with cards, and United States Dollars (USD). To date over USD the platform. 10 million has been transacted through We invested in revamping the automatic ATM cash network with depositors dispensing. and This US has Dollar allowed convenience our cash of customers accessing the on their and accounts in both depositing US shillings. Dollars and cash Uganda The Bank launched a partnership to with MasterCard and on our ATMs enable the acceptance of their cards payment more creating terminals, (POS) Point-of-Sale options for our customers. Corporate Social Responsibility In 2017 the Orient Business Academy, the premier Corporate Social Bank Responsibility entered its second year. The Project Academy offers training to Small and Medium of size Enterprises (SME) the skills. in financial literacy and business entreprenuers the following; training covered This year’s BOARD OF DIRECTORS SITTING (L -R) Julius Kakeeto - MD/CEO, Ketan Morjaria - Vice Chairman, Michael Cook - Chairman, Hemen Shashikant Shah - Non Executive Director

Annual Report and Consolidated Financial Statements 14 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTSFINANCIAL

STANDING (L - R) Zhong Shuang Quan - Non Executive Director, Joram Kahenano - Non Executive Director Darshana Bhatia - Executive Director Nicholas Ecimu - Secretary Francis M. Byaruhanga - Non Executive Director Jay Karia (not in photo) - Non Executive Director

Annual Report and Consolidated Financial Statements 15 For the year ended 31 December 2017 BOARD OF DIRECTORS

MICHAEL COOK Chairman Michael Cook was a senior career diplomat and a former British High Commissioner to Uganda, with a wide range of political and commercial experience in Scandinavia, the Caribbean, Turkey and Africa. After retiring from the Diplomatic Service he was a member of a commission established by David Cameron before he became British Prime Minister, to advise on future aid policy.

KETAN MORJARIA Vice Chairman Cr Ri Co Al Mr. Morjaria is a founder and Board Member of both Orient Bank and in Kenya, and a strategic shareholder in both institutions. He has wide experience in commerce and property development in Africa, the United Kingdom, and the Middle East. He is a member of the Institute of Chartered Accountants of England and Wales and the Institute of Certified Public Accountants of Uganda.

JULIUS KAKEETO Managing Director/CEO Cr Al Ri Mr. Kakeeto is a Fellow of the Association of Chartered Certified Accountants (FCCA) and holds an MBA from Manchester Business School, United Kingdom. He has served in several management capacities, among others, in Citigroup London as a Vice President in Global Markets, in as Chief Financial Officer, and in Equity Bank Uganda as Finance Director. He started his career with Ernst & Young.

HEMEN SHASHIKANT SHAH Non Executive Director Ri Al Co Cr Mr. Hemen Shah is a graduate of Harvard University and a professional banker with over 23 years of cognitive experience. Mr. Shah has held several Board memberships including Directorships on the Boards of; SCB Sierra Leone, Gambia, Cameroon, Ghana and Chairman, Board of Directors for Standard Chartered Bank Cote d’Ivoire. Mr. Shah is a founding partner and Board member of 8 miles LLP.

JORAM KAHENANO Non Executive Director Au Ri Mr. Kahenano is a Fellow of the Uganda Institute of Bankers and a Fellow of Chartered Institute of Bankers. He has held various director positions in Bank of Uganda where he worked for 36 years. He has in addition served on various Boards including Uganda Institute of Bankers, , , Church of Uganda and Uganda Christian University. Joram is currently a trustee of Uganda Small Scale Industries.

Al Member of Asset and Liability Committee Cr Member of Credit Committee Au Member of Audit Committee

Annual Report and Consolidated Financial Statements 16 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Al Al Ri Au Al Cr Cr Co Committee Chairman

Member of Compensation Committee Co Non Executive Director NICHOLAS ECIMU Company Secretary Mr. Ecimu practices law with Sebalu & Lule he is a Partner. law firm, where commercial Advocates, a premier corporate and He has previously served with Ministry (PUSRP) of in Finance, Uganda’s Planning and Economic Development the and Privatisation & Utility was attached Sector to Edward Nathans Reform Sonnenbergs, one of Project South premier Africa’s law firms, as visiting Attorney in 2006. DARSHANA BHATIA Executive Director Ms. Bhatia is a member of worked previously as Head the of Finance at . Prior to that, Darshana worked Institute Degree of Bachelor’s a Chartered holds She 2013. to 2006 Accountants from Bank Orient at of Finance of Head as India. She is She Mumbai. of University the from Auditing & Accounting Financial – Commerce in of Institute the & India of Accountants Works & Cost of Institute the of member a also Certified Public Accountants of Uganda. JAY KARIA JAY Alternative - Non Executive Director Karia Mr. is a business magnate with over 25 years diversified exposure in London, Kenya and Uganda. He has served in Lloyds several Exports managerial UK, capacities Manager as Kabril Manager Limited UK. boards including He Lloyds Exports and, has Kabril Limited- also in London severed UK, Orion on FXB Ltd several Kenya. Bank in Nairobi and Credit Mr. Byaruhanga holds a Mr. Masters Degree in Business Administration. He has over 25 years experience in the areas of Management, on Finance, project sanitation and water rural with worked Accounting, has He Management. Logistics and Procurement Road Agency Formation Unit. was a Director an executive level and ZHONG SHUANG QUAN Non Executive Director the from Management Business in Arts of Bachelors a holds Quan Shuang Zhong Mr. in interests diversified with Businessman prominent a is He University. Normal Sichuan Manufacturing of fields the in specializing world the of parts other and Asia Africa, East household plastics, Large Scale Rice in farming, household Import goods Trade and Enterprise. Manufacturing and Trade in experience Managerial has He Transport. Road FRANCIS MAGEMBE BYARUHANGA FRANCIS MAGEMBE Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Member of Risk/Compliance Committee 17 Ri EXECUTIVE COMMITTEE

JULIUS KAKEETO Managing Director/CEO

DARSHANA BHATIA Executive Director

MILLIE NKAJA Head of Credit

PANKAJ SHARMA Head of Operations

ANDREW AGABA Head of Retail & SME

Annual Report and Consolidated Financial Statements 18 For the year ended 31 December 2017 et unsecured bid bonds of up to Ugx 200m in 24 hrs

-. 0800 144 551 rientan REPORT OF THE DIRECTORS

The Directors present their report together with of internal control or suspected infringements of laws, the audited consolidated and separate financial rules and regulations which come to its attention. statements of the Orient Bank Limited (the “Bank”) and its subsidiary, Equity Stock Brokers Limited b) Asset and Liability Committee (together ‘’the Consolidated’’) for the year ended 31 ALCO is headed by a Non-Executive Director and December 2017. meets quarterly. It also comprises the following: i) Mr. Hemen Shashikant Shah ACTIVITIES ii) Mr. Ketan Morjaria The principal activities of the Bank are the provision of iii) Mr. Zhong Shuang Quan commercial banking and related financial services. (Alternative: Mr. Jay Karia) iv) Mr. Julius Kakeeto The principal activity of the subsidiary is stock v) Ms. Darshana Bhatia brokering. The overall objective of the Asset and Liability RESULTS AND DIVIDEND Committee is to maximize earning and return on capital with acceptable and controllable levels of the The Consolidated and Bank profit for the year of main treasury risks i.e. liquidity, interest rate, foreign Ushs 4,818 million (2016: profit of Ushs 6,036 million) exchange and concentration risks. The assets and and Ushs 4,810 million (2016: profit of Ushs 5,819 liabilities of the Bank shall be managed to maximize million) respectively has been transferred to retained shareholder value, to enhance profitability and earnings. The directors do not recommend payment increase capital, and to protect the Bank from any of dividend for the year (2016: Nil). excessive financial risks arising from changes in

interest rates. CORPORATE GOVERNANCE Orient Bank Limited has established a tradition of best c) Remuneration and Nominations Committee practices in corporate governance. The corporate This committee decides on recruitment at senior governance framework is based on an effective levels based on responsibilities and remuneration of independent board, the separation of the board’s management staff and directors. It meets quarterly. supervisory role from the executive management The committee is headed by a Non-Executive Director and the constitution of board committees generally and comprises: comprising a majority of non-executive directors and i) Mr. Francis M. Byaruhanga chaired by a non-executive director to oversee critical ii) Mr. Ketan Morjaria areas. iii) Mr. Hemen Shashikant Shah

BOARD OF DIRECTORS The Committee is responsible for ensuring that the Orient Bank Limited has a broad-based Board of Board remains balanced, both in terms of skills Directors. The board functions either as a full board and experience, and between Executive and Non- or through various committees constituted to oversee Executive Directors. It is authorized to lead the specific operational areas. The Board has constituted process for appointments to the Board, and make six committees. These are the Audit Committee, recommendations to the Board, ensuring there is a Risk Committee, Asset & Liability Committee, formal, rigorous and transparent procedure. Remunerations and Nominations Committee, Credit Committee, Board IT Committee. All of these Board d) Risk committee Committees are constituted and chaired by non- This committee is headed by a Non-Executive Director executive directors. As at 31 December 2017, the and meets quarterly. It is comprised of the following Board of Directors consisted of 8 members. members: i) Mr. Hemen Shashikant Shah a) Audit Committee ii) Mr. Joram Kahenano This committee is chaired by an independent Non- iii) Mr. Ketan Morjaria Executive Director. The committee meets every iv) Mr. Julius Kakeeto quarter and also comprises: v) Ms. Darshana Bhatia i) Mr. Francis M. Byaruhanga ii) Mr. Joram Kahenano The committee is granted the authority for (i) oversight and advice to the board in relation to the current and The Audit Committee informs the Bank and the Board potential risk exposures of OBL; (ii) oversight of the of any risks, suspected frauds or irregularities, failures Bank’s Risk Management Framework; (iii) the future

Annual Report and Consolidated Financial Statements 20 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS become entitled to receive any directors’ fees, and benefitamounts receivable by executive other than and the senior contracts under employment directors staff incentive scheme. emoluments aggregatefor The directors for services in rendered the amount of financial year is disclosed in Note 36 to the financial statements. time any at nor year financial the of end the at Neither during the year did there exist any which arrangement the to Bank is a party whereby directors acquire might benefits by means of acquisitionin shares of or debentures of the corporate. Bank or any other body The auditors, Deloitte & during the year and Touche, have expressed their willingness were appointed 167(2) section with accordance in office in continue to of the Ugandan Companies Act, 2012. THE BOARD BY ORDER OF Ecimu Secretary Nicholas C/O Sebalu & Lule Advocates Kampala DIRECTORS The directors who held office during the year and up indicated on page 3. are to the date of this report CONCERN OF GOING STATEMENT to directors Nothing has come to the attention of the indicate that the Consolidated will a not going remain concern for at least twelve months from the date of this statement. INDEPENDENT AUDITORS

Annual Report and Consolidated Financial Statements For the year ended 31 December 2017

Mr. Ketan Morjaria Mr. Hemen Shashikant Shah Mr. Julius Kakeeto Mr. Ms. Darshana Bhatia Ketan Morjaria Mr. Shah Hemen Shashikant Mr. Byaruhanga Francis M. Mr. Julius Kakeeto Mr. Ms. Darshana Bhatia i) ii) iii) iv) i) ii) iii) iv) v) 21 Directors and their Benefits During the financial year and up to the report, date of this other than as disclosed in financial Note statements, 37 to the directorno receivedhas or The Board IT It meets quarterly and comprises: Executive Director. Committee is chaired by a Non- authority for The IT Committee is granted the oversight and advice to the Board on IT strategy and initiatives, and to oversee the and IT security. cost effectiveness of IT projects implementation and In addition to committees the on above a management committees, level senior management comprised whose there frequency of meetings of is are quarterly. monthly and weekly, daily, Committee e) Credit risk strategy of the bank, including strategy for capital capital for strategy including bank, the of strategy risk of the determination management and and liquidity risk appetite and tolerance, and (iii) promoting a risk awareness culture in the bank, alongside established procedures. policies and The Board Credit Committee is chaired by comprises: It meets quarterly and Executive Director. a Non- quality the that ensure to seeks Committee Credit The of the asset Bank’s book remains within acceptable parameters and that the business has credit an consistent policy, with regulatory requirements effective and prudent risk management practices. f) IT Committee STATEMENT OF DIRECTORS’ RESPOSIBILITIES

The Companies Act of Uganda, 2012 requires the view of the state of the financial affairs of the Bank directors to prepare consolidated and separate and of its profit and cash flows for the year ended financial statements for each financial year that 31 December 2017 in accordance with International give a true and fair view of the state of affairs of the Financial Reporting Standards, the requirements Consolidated and Bank as at the end of the financial of the Companies Act of Uganda, 2012 and the year and of its results for that year. It also requires the Financial Institutions Act 2004 as amended by Directors to ensure that the Consolidated keeps proper the Financial Institutions (Amendment) Act, 2016. accounting records that disclose, with reasonable The directors further accept responsibility for the accuracy, the financial position of the Consolidated. maintenance of accounting records that may be relied They are also responsible for safeguarding the assets upon in the preparation of financial statements and of the Consolidated. for such internal control as the Directors determine is necessary to enable the preparation of consolidated The directors accept responsibility for these and separate financial statements that are free from Consolidated and Separate financial statements, material misstatement, whether due to fraud or error. which have been prepared using appropriate accounting policies supported by reasonable and prudent judgements and estimates, in conformity Nothing has come to the attention of the directors to with International Financial Reporting Standards, the indicate that the Consolidated will not remain a going requirements of the Companies Act of Uganda, 2012 concern for at least twelve months from the date of and the Financial Institutions Act, 2004 as amended this statement. by the Financial Institutions (Amendment) Act, 2016. The Consolidated and Separate financial statements The directors are of the opinion that the Consolidated were approved by the Board of Directors on April 28 and Separate financial statements give a true and fair 2018 and signed on its behalf by;

Michael Cook Ketan Morjaria Julius Kakeeto Nicholas Ecimu Chairman Vice Chairman Managing Director/ CEO Company Secretary

Annual Report and Consolidated Financial Statements 22 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Ü advances and performed a detailed independent focusing identified, losses credit the of assessment loss. is evidence of an incurred on whether there (IFRSs) and requirements of the Uganda Companies 2004 Act Institutions Financial the as well as 2012 Act, (Amendment) Institutions Financial the by amended as Act, 2016. Basis for Opinion We conducted International our Standards audit further are on under those standards responsibilities in Auditing accordance the Audit Responsibilities for (ISAs). described in the Auditor’s with Our our report. of the Financial Statements section of We are independent of with the Bank the in for accordance International Accountants’ Code Ethics of Accountants (IESBA Code) Ethics together Standards with the for ethical Professional Board requirements that are relevant to financial statements our in Uganda.We have audit fulfilled our of the these with accordance in responsibilities ethical other the IESBA Code. and requirements We believe that the audit evidence we have obtained our for a basis provide to appropriate and sufficient is opinion. How the matter was addressed in the audit How the matter was addressed Our audit included identifying relevant controls evaluating and that identified risks impairment the address the design and implementation, and where possible the operating effectiveness, of these controls. We focused on controls over impairment the losses; identification of the governance the assumptions; and inputs models, credit for place processes in considered; are judgements key where forums credit and how the Directors ensure they have appropriate oversight over loan provisions. a) Our procedures in response to the risks specific to the individually clusters) included the following; Corporate and retail assessed impairment (in the • We selected a sample of performing loans and Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 TO THE MEMBERS OF ORIENT BANK LIMITED BANK OF ORIENT THE MEMBERS TO INDEPENDENT AUDITORS AUDITORS INDEPENDENT REPORT 23 Key Audit Matter Allowance for impairment on loans and advances The allowance for impairment of loans to customers is considered to be a matter the requires application of significant judgement and of significance as it use of subjective assumptions by the directors. The allowances portfolio and individual both records Bank of loans and advances to customers. The Corporate “corporate”) represent 79% (Ushs 253 Billion) of the banking group`s net loan are exposure, exposures These Billion). 66 cluster (Ushs whereas 21% represent Retail clients (collectively considerations specific require and nature in different to loan impairment. in regards All loans that show increased on management credit judgement and primarily risks, based on based days in arrears, are monitored individually (individual impairment assessment). Key audit matters audit our in significance most of were judgement, professional our in that, matters those are matters audit Key in addressed were matters These period. current the for statements financial separate and consolidated the of the context of our audit of the consolidated and separate financial statements as a whole, and in forming our a separate opinion not provide and we do opinion thereon, on these matters. We We have audited the financial statements consolidated of Orient and Bank Limited separate subsidiary, as and its set out on pages 14 Consolidated and Separate financial statements (“the to 123. These and Consolidated the comprise statements”) financial Separate Statements of financial position Separate and Consolidated the and 2017, December as at 31 comprehensive other and loss or profit of Statements income, Consolidated and Separate Statements of Separate and Consolidated and equity in changes Statements of cash flows for the yearand ended, then notes to the financial summary of significant accounting policies. statements, including a In our opinion, financial statements the present fairly 31 at as Consolidated Bank and Consolidated the of affairs financial the state and of the separate December 2017, and of their financial accordance in ended performance then year the for flows cash and with International Financial Reporting Standards REPORT ON THE CONSOLIDATED AND SEPARATE SEPARATE AND THE CONSOLIDATED ON REPORT FINANCIAL STATEMENTS Opinion INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF ORIENT BANK LIMITED (continued) Key audit matters (continued)

Key Audit Matter How the matter was addressed in the audit Û The assessment process requires detailed knowledge • For a sample of loans and advances that had been of the borrower and requires credit officers to use individually assessed and impaired, including judgement to determine whether a loss event has those loans on the watch list, we independently occurred and the amount of the resulting loss. challenged the valuation of impairment losses that For both corporate and retail exposures not included had been incurred, including developing our own in the specific impairment assessment above, are expectation of the amount of the provision. then monitored through delinquency and loss rate • In order to focus our procedures on the areas statistics (portfolio impairment assessment). Given where there is a higher risk, we performed detailed the strict Bank policies, impaired loans are evaluated credit loss assessments of loans and advances for impairment on an individual basis to the extent of with higher-risk credit grades. a loss event. • When performing work on the valuation of provisions, we paid particular attention to the Significant judgement is required by the Directors in valuation of, and rights to, security held. Where assessing the impairment against individual loans management has used specialists to provide and advances. Given the combination of inherent valuations, we assessed their competence and the subjectivity in the valuation, and the material nature timeliness of these valuations. of the balance, we considered the valuation of • For a sample of selected impaired loans and impairment allowance on loans and advances to advances, we assessed the Directors’ forecast customers to be a key audit matter in our audit of the of recoverable cash flows, valuation of collaterals, financial statements. estimates of recovery on default and other sources of repayment. We evaluated the consistency of The judgements applied in determining the key assumptions applied, benchmarking these to impairment include; our own understanding of the relevant industries • the expected period of recovery in future expected and business environments, to assess the validity cash flows; of the collateral valuations. • the realizable value of the collateral securing the • We made use of our internal specialists to advance and other expected cash flows; critically assess impairment models and the key • the time to realization; assumptions that drive the collective impairment • the average historical loss rate per portfolio valuation. • We re-computed the Directors’ calculation of the Refer to Note 21 of the consolidated and separate impairment allowances to check the accuracy of financial statements. the data captured in the impairment computation.

Other matters we conclude that there is a material misstatement of The consolidated and separate financial statements this other information, we are required to report that of Orient Bank Uganda Limited for the year ended fact. We have nothing to report in this regard. 31 December 2016 were audited by another auditor who expressed an unmodified opinion on those Responsibilities of directors for the statements on 26 April 2017 . Consolidated and Separate Financial Statements Other Information The directors are responsible for the preparation of The directors are responsible for the other the Consolidated and Separate financial statements information. The other information comprises the (“financial statements”) that give a true and fair view information included in the ‘Report of the Directors’ in accordance with International Financial Reporting (page 4 – 7) and ‘Supplementary information to the Standards, and in the manner required by the Uganda annual report and consolidated and separate financial Companies Act, 2012 and the Financial Institutions statements (page 124 – 131). The other information Act, 2004 as amended by the Financial Institutions does not include the financial statements and our (Amendment) Act, 2016 and for such internal control auditor’s report thereon. Our opinion on the financial as the directors determine is necessary to enable statements does not cover the other information and the preparation of financial statements that are free we do not express any form of assurance conclusion from material misstatement, whether due to fraud or thereon. In connection with our audit of the financial error. In preparing the Consolidated and Separate statements, our responsibility is to read the other financial statements, the directors are responsible for information and, in doing so, consider whether the assessing the Bank’s ability to continue as a going other information is materially inconsistent with the concern, disclosing, as applicable, matters related financial statements or our knowledge obtained to going concern and using the going concern basis in the audit or otherwise appears to be materially of accounting unless the directors either intend to misstated. If, based on the work we have performed, liquidate the Bank or to cease operations, or have no

Annual Report and Consolidated Financial Statements 24 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS We We have obtained explanations which to the best of our knowledge all the of purposes the for necessary were belief, the and information and audit; In our opinion, proper books been of kept by account the have bank, so far as appears from our examination of those books; of Statements Consolidated and Separate The Consolidated and sheet) (Balance position financial and Separate Statements of profit or in are loss) or (profit income comprehensive other loss and with the books of account. agreement cause the Bank to cease to continue as a going concern. Evaluate the overall presentation, financial Separate and Consolidated structure the of content and whether and disclosures, the including statements, the financial statements represent the underlying achieves that manner a in events and transactions fair presentation. ‚ We communicate with the directors regarding, among regarding, directors the with communicate We other matters, the planned scope and timing of the audit and significant auditsignificant findings, deficiencies including any in internal identify during our audit. control that we We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with may that matters other and relationships all them be reasonably thought to bear on our independence, safeguards. applicable, related and where ‚ ______Certified Public Accountant of Uganda Report on other Legal Requirements by the Uganda Companies Act, 2012, As required audit, that: to you based on our we report 1. 2. 3. audit the for responsible partner engagement The is Norbert in this independent auditor`s report resulting Practicing Certificate No. P0053. Kagoro From the matters communicated with the directors, we determine those significance matters in the that auditof were the financialof the statements current of period and are therefore the key audit most matters. We describe these matters in our auditor’s report unless rare law extremely in when, or matter the about disclosure or regulation precludes circumstances, public we determine that a matter because the our report in be communicated not should reasonably would so doing of consequences adverse be expected to outweigh the public interest benefits of such communication. Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Conclude on the appropriateness of the directors` of the directors` Conclude on the appropriateness and, accounting of concernbasis going the of use based on the audit evidence obtained, a whether material uncertainty exists related to events or conditions that may cast significant doubt on the we If concern. going a as continue to ability Bank’s are we exists, uncertainty material a that conclude to report auditor’s our in attention draw to required the related disclosures in the financialour statements modify to inadequate, are disclosures such if or, opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. future However, events or conditions may Obtain an understanding of internal control relevant relevant control internal of understanding an Obtain to design audit procedures to the audit in order that are appropriate in the circumstances, but not for the purpose of expressing an opinion on internal control. the effectiveness of the Bank’s Evaluate the of reasonableness the and used policies appropriateness of disclosures accounting estimates and related accounting made by the directors. Identify and misstatement of the financial statements, whether assess the due to fraud or error, risks design and procedures perform responsive to those audit risks, and of obtain material audit evidence that is sufficient andto appropriate provide a basis for our opinion. The risk of not from detecting a material misstatement resulting fraud is higher than for one resulting from as fraud may error, involve collusion, intentional forgery, omissions, misrepresentations, or the override of internal control. 25 ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ As part of an audit exercise in accordance with professional ISAs, professional we scepticism judgment throughout the also: audit. and We maintain

Auditor’s Responsibilities for the Audit of Responsibilities for the Auditor’s and Separate Financial the Consolidated Statements Our objectives are to obtain reasonable about assurance whether financial the statements Consolidated (“financialwhole and are statements”) free from material Separate misstatement, whether as a due to and fraud to or report issue error, an auditor’s that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing (ISAs) will material misstatement when it exists. always detect a and are fraud or error Misstatements can arise from aggregate, the in or individually if, material considered they could reasonably be expected to influence the economic decisions of users taken on the basis these financial statements. of realistic realistic alternative but to do so. Those charged with Bank’s the overseeing for responsible are governance process. reporting financial CONSOLIDATED AND SEPARATE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

CONSOLIDATED SEPARATE 2017 2016 2017 2016 Note Ushs’000 Ushs’000 Ushs’000 Ushs’000 Interest and similar income 5 56,462,951 50,311,082 56,462,951 50,311,082 Interest and similar expenses 5 (21,608,220) (17,851,254) (21,608,220) (17,851,254) Net interest income 34,854,731 32,459,828 34,854,731 32,459,828 Net fee and commission income 6 20,099,280 20,095,460 19,911,444 19,593,996 Net foreign exchange gains 7 3,762,848 4,021,648 3,762,848 4,021,648 Revenue 58,716,859 56,576,936 58,529,023 56,075,472 Loan impairment charges 8 (6,253,779) (2,830,954) (6,253,779) (2,830,954) Employee benefits expenses 9 (17,810,258) (15,699,891) (17,698,394) (15,577,028) General and administrative expenses 10 (12,304,528) (11,459,543) (12,299,578) (11,454,853) Other operating expenses 12 (15,373,520) (17,612,208) (15,312,424) (18,586,576) Profit before income tax 6,974,774 7,937,564 6,964,848 7,626,061 Income tax expense 13 (2,156,609) (1,902,053) (2,153,997) (1,807,054) Profit for the year 4,818,165 6,035,511 4,810,851 5,819,007 Other comprehensive income that will not be reclassified to the statement of profit or loss

Revaluation surplus on buildings 24 - 1,065,718 - 1,065,718 Deferred income tax on revaluation gain 26 - (319,715) - (319,715) Other comprehensive income for the 746,003 746,003 year, net of tax - - Total comprehensive income for the 4,818,165 6,781,514 4,810,851 6,565,010 year

Profit attributable to: Owners of the company 4,816,946 5,992,210 Non-controlling interests 1,219 43,301 4,818,165 6,035,511

Total comprehensive income for the year attributable to:

Owners of the company 4,816,946 6,738,213 Non-controlling interests 1,219 43,301 4,818,165 6,781,514

The notes on pages 31 to 99 form an integral part of these consolidated and separate financial statements.

Annual Report and Consolidated Financial Statements 26 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS 2016 Ushs’000 - - - 554,122,022 107,576,105 107,576,105 4,727,506 2,982,438 3,116,161 96,750,000 446,545,917 19,147,023 120,870 40,476 3,613,008 423,624,540 554,122,022 22,791,061 3,918,290 11,538,262 204,305 6,269,441 250,755,828 80,000 99,870,917 376,700 80,025,296 78,291,922 Nicholas Ecimu Company Secretary 2017 SEPARATE Ushs’000 2,434,811 13,494,151 680,873,469 112,678,962 568,194,507 680,873,469 112,678,962 - 96,750,000 12,736,999 83,949 4,769 155,060 555,213,730 23,990,548 3,275,227 16,895,324 4,898,168 310,780,076 80,000 1,680,021 46,654,419 1,551,136 177,236,485 93,832,065 - - - 2016 Ushs’000 446,244,663 554,216,674 - - 554,216,674 107,972,011 94,173 107,877,838 5,029,239 2,982,438 3,116,161 96,750,000 879 19,221,187 120,870 40,476 3,613,008 423,248,243 22,791,061 3,918,290 11,541,193 196,846 6,405,164 250,755,828 99,870,917 376,700 80,068,753 78,291,922 Julius Kakeeto Managing Director/ CEO Managing Director/ 2017 95,392 83,949 5,742 CONSOLIDATED 4,769 155,060 Ushs’000 2,434,811 340 3,275,227 5,023,610 1,680,021 1,551,136 13,801,980 96,750,000 12,818,688 23,990,548 16,896,456 46,654,419 93,832,065 680,937,424 113,082,183 567,855,241 680,937,424 - - 112,986,791 554,792,435 310,780,076 177,248,124 33 32 31 26 30 29 18 27 28 26 25 24 23 22 21 20 19 18 17 15 19a Note Vice Chairman Vice Ketan Morjaria Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Chairman Michael Cook CONSOLIDATED AND SEPARATE STATEMENT STATEMENT AND SEPARATE CONSOLIDATED POSITION OF FINANCIAL 27 Total equity and liabilities Total Equity attributable to owners of the Bank interests Non-controlling equity Total Retained earnings Credit risk reserve Credit Revaluation reserve Capital and reserves Issued capital Total liabilities Total Deferred income tax liability Deferred Other liabilities Refinance loans Derivative financial instruments Deposits due to other banks Liabilities Customer deposits Total assets Total Deferred income tax asset Deferred Intangible assets Property and equipment Property Current income tax recoverable Current Other assets Loans and advances to customers Investment in subsidiary Government securities – Held-for- trading Government securities – Held-to- maturity Derivative financial assets Derivative financial Deposits and balances due from due from Deposits and balances banking institutions Assets with Central Bank Cash and balances The Consolidated and separate financial statements were authorised for issue by the Board of Directors on 29 on Directors of Board the by issue for authorised were statements financial separate and Consolidated The April 2018 and signed on its behalf by: - - - 65,523 746,003 292,007 Ushs’000 4,818,165 6,035,511 4,818,165 6,781,514 80,874,974 20,250,000 87,722,011 Total equity Total 107,972,011 107,972,011 113,082,183 113,082,183 ------Non- 1,219 1,219 50,872 94,173 43,301 94,173 43,301 95,392 94,173 95,392 interest Ushs’000 controlling controlling - - - 65,523 746,003 292,007 4,816,946 5,992,210 4,816,946 6,738,213 Ushs’000 80,824,102 20,250,000 87,627,838 107,877,838 107,877,838 112,986,791 112,986,791 of the parent to equity holders Total attributable Total - - - 973,357 296,471 earnings Retained 1,497,897 5,029,239 4,816,946 5,992,210 5,029,239 4,816,946 5,992,210 7,786,578 2,982,438 Ushs’000 (2,757,339) 10,819,542 13,801,980 ------reserve 225,099 225,099 (Note 34) 2,982,438 2,982,438 2,982,438 2,757,339 Ushs’000 (2,982,438) Credit risk Credit ------reserve 746,003 746,003 292,007 (973,357) (230,948) (Note 33) 2,601,106 3,116,161 3,116,161 2,434,811 3,116,161 2,434,811 Ushs’000 Revaluation ------(Note 32) Ushs’000 76,500,000 20,250,000 96,750,000 96,750,000 96,750,000 76,500,000 96,750,000 Issued capital CONSOLIDATED STATEMENT OF CHANGES IN EQUITY STATEMENT CONSOLIDATED Year ended 31 December 2016 Year At start of year with owners Transactions in issued capital Increase ended 31 December 2017 Year At start of year Profit for the year Profit At end of year Profit for the year Profit income for the year comprehensive Total Gain on property revaluation Gain on property Transfer to retained earnings to retained Transfer Total comprehensive income for the year comprehensive Total Deferred income tax thereon Deferred Transfer to retained earnings to retained Transfer Total Total Transfer to credit risk reserve to credit Transfer Transfer to credit risk reserve to credit Transfer At end of year

Annual Report and Consolidated Financial Statements 28 For the year ended 31 December 2017

OVERVIEW GOVERNANCE FINANCIAL STATEMENTS

At end of year of end At 112,678,962 13,494,151 - 2,434,811 96,750,000

Transactions with owners: with Transactions

Transfer from credit risk reserve risk credit from Transfer - 2,982,438 (2,982,438) - -

Total 112,678,962 10,511,714 2,982,438 2,434,811 96,750,000

Deferred income tax thereon tax income Deferred 292,007 - - 292,007 -

Transfer to retained earnings retained to Transfer - 973,357 - (973,357) -

Total comprehensive income for the year the for income comprehensive Total 4,810,851 4,810,851 - - -

Profit for the year the for Profit 4,810,851 4,810,851 - - -

At start of year of start At 107,576,104 4,727,506 2,982,438 3,116,161 96,750,000

Year ended 31 December 2017 December 31 ended Year

At end of year of end At 107,576,105 4,727,506 2,982,438 3,116,161 96,750,000

Increase in issued capital issued in Increase 20,250,000 20,250,000 - - -

Transactions with owners: with Transactions

Transfer to credit risk reserve risk credit to Transfer - (2,757,339) 2,757,339 - -

Total 87,326,103 7,484,845 225,099 3,116,161 76,500,000

Transfer to retained earnings retained to Transfer - (230,949) 296,471 65,522

Total comprehensive income for the year the for income comprehensive Total - 746,004 6,565,011 5,819,007 -

Increase in revaluation surplus revaluation in Increase - 746,004 746,004 -

Profit for the year the for Profit - - 5,819,007 5,819,007 -

At start of year of start At 76,500,000 2,601,106 225,099 80,695,572 1,369,366

Year ended 31 December 2016 December 31 ended Year (Note 32) (Note (Note 33) (Note (Note 34) (Note

Ushs’000 Ushs’000 Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Ushs’000 Ushs’000 Ushs’000

Revaluation reserve Revaluation Issued capital Issued Retained earnings Retained reserve risk Credit Total equity Total SEPARATE STATEMENT OF CHANGES IN EQUITY IN CHANGES OF STATEMENT SEPARATE 29 CONSOLIDATED AND SEPARATE STATEMENT OF CASH FLOWS

CONSOLIDATED SEPARATE 2017 2016 2017 2016 Note Ushs’000 Ushs’000 Ushs’000 Ushs’000 Operating activities Profit before income tax 6,974,774 7,937,564 6,964,848 7,626,061 Adjustments: Depreciation 24 2,895,019 2,507,727 2,893,223 2,505,071 Amortisation of intangible assets 25 2,048,661 2,661,458 2,048,661 2,661,458 Unrealised foreign exchange gain (1,546,367) (336,224) (1,546,367) (336,224) Provision on litigation 488,215 1,797,819 488,215 1,797,819 Impairment charge on loans and advances 6,253,779 2,830,954 6,253,779 2,830,954 Profit on disposal of property and equipment 68,489 (9,059) 68,489 (9,059) Profit before changes in operating assets and liabilities 17,182,570 17,390,239 17,170,848 17,076,080 (Increase) / decrease in cash reserve requirement (11,416,000) 1,956,000 (11,416,000) 1,956,000 Decrease in deposits due to banking institutions (3,457,948) (389,156) (3,457,948) (389,156) Increase in loans and advances (66,278,027) (76,717,028) (66,278,027) (76,717,028) Decrease / (increase) in investment in government securities 30,695,777 (9,399,219) 30,695,777 (9,399,219) Decrease in other assets 1,932,567 1,305,189 1,922,282 1,576,492 Increase/(decrease) in customer deposits 131,544,192 (17,124,400) 131,589,190 (16,902,222) (Decrease)/increase in BOU refinance loan (36,921) 16,703 (36,921) 16,703 Increase in other liabilities (6,890,714) 4,093,251 (6,898,239) 4,070,534 Income taxes paid 23 (2,839,956) (2,847,699) (2,823,606) (2,756,366) 73,252,970 (99,106,360) 73,296,508 (98,544,263) Net cash flows generated from/(used in) operating activities 90,435,540 (81,716,120) 90,467,356 (81,468,183) Investing activities Purchase of property and equipment 24 (9,693,439) (4,710,717) (9,693,439) (4,710,717) Proceeds from sale of property and equipment 54,038 54,038 54,038 54,038 Purchase of intangible assets 25 (333,323) (216,377) (333,323) (216,377) Net cash flows used in investing activities (9,972,724) (4,873,056) (9,972,724) (4,873,056) Financing activities Increase in share capital 31 - 20,250,000 - 20,250,000 Net cash flows generated from financing activities - 20,250,000 - 20,250,000 Cash and cash equivalents at start of year 146,277,375 212,371,231 146,233,918 212,325,156 Net increase/(decrease) in cash and cash equivalents 80,462,816 (66,339,176) 80,494,632 (66,091,239) Cash and cash equivalents at the end of the year 16 226,740,191 146,277,375 226,728,550 146,233,918

Annual Report and Consolidated Financial Statements 30 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Ü Basis of consolidation Has power over the investee; Has power over the from returns variable to rights, has or exposed, Is the investee; and its involvement with Has the ability to use returns. its power to affect its ‚ ‚ ‚ ‚ ‚ ‚ The Bank reassesses whether or not it there that indicate circumstances controls and facts if investee an elements of of the three changes to one or more are listed above. control Profit or comprehensive lossincome are attributed to the owners of the Total Bank and interests. to the non-controlling and each component comprehensive income of subsidiary is attributed to of other the owners of the Bank and to interests the non-controlling even if this results having a deficit balance. interests in the non-controlling financial the to made are adjustments necessary, When statements of subsidiary to bring their accounting accounting policies. policies into line with the group’s All intragroup assets and liabilities, equity, expenses income, and cash flowseliminated are Consolidated the of members between relating to transactions in full on consolidation. A change in the ownership interest of a without loss subsidiary, of control, is accounted for as an equity transaction. If the Consolidated (including loses assets control over related a the derecognises it subsidiary, goodwill), liabilities, non-controlling interest (NCI) and other components of while equity, any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value at the date of loss of control. Given the level of judgement required 2.3 The consolidated and separate financial statements comprise the financial statementsLimited and of Orient Bank its Limited, subsidiary, made up Equity to 31 December 2017. Stock Control is Brokers Bank; achieved when the Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when the Bank loses control of the Specifically, subsidiary. income and expenses included in the or disposed of during the year are of a subsidiary consolidated statement acquired of profit or loss income comprehensive the from date the Bank gains and other control to ceases Bank the when date the until control the subsidiary. significant to the financial statements,are disclosed in Note 4. Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Basis of preparation Derivative financial instruments are measured at fair value Financial instruments at fair value through profit at fair value measured or loss are SUMMARY OF SIGNIFICANT SUMMARY ACCOUNTING POLICIES GENERAL INFORMATION GENERAL TO THE NOTES FINANCIAL STATEMENTS Plot 6 & 6A, Kampala Road Plot 6 & 6A, Kampala P O Box 3072 Kampala 31 ‚ ‚ ‚ ‚ The preparation of financial statements in conformity accounting critical certain of use the requires IFRS with estimates. It also requires the directors to judgement exercise in the process accounting of policies. applying Changes the in Bank’s assumptions have a may significant impact on the financial statements in the period the assumptions changed. The complexity, or judgement of degree higher a involving areas or areas where assumptions and estimates are 2.1 Statement of Compliance statements The consolidated and separate financial with International in accordance have been prepared Financial Reporting Standards. 2.2 The consolidated and separate financial statements except basis, cost historical a on prepared been have the following; The principal accounting policies applied in the The principal accounting policies applied and separate of these consolidated preparation policies These below. out set are statements financial have been consistently stated. unless otherwise presented, applied to all the years 2. The Bank is licensed Uganda and under the regulated FIA by 2004 FIA Bank 2016. as For the of Companies amended Act of Uganda, by 2012 the purposes, reporting the balance sheet is represented statement of by the consolidated and separate financial position and the profit and loss account by the statement of comprehensive consolidated and separate financial statements. income in these The financialstatements the by issue for approved been have 2017 December for the of Directors. Board year ended 31 1. Orient Bank Limited (the ‘Bank’) and its Equity subsidiary Stock Consolidated) are incorporated in Uganda under the Brokers are and companies, liability limited as Act Companies Limited, (together domiciled in Uganda. The the address of its office is: registered NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued) 2.3 Basis of consolidation (continued)

Ü regarding consolidation of structured entities, these of the debt instrument by sale or by use, or considerations are described further in the Critical whether it is probable that the issuer will pay all accounting estimates and judgements in Note 4. the contractual cash flows; Disclosures for investment in subsidiaries are provided in Note 20. 2. When an entity assesses whether taxable profits will be available against which it can utilise a Non-controlling interests deductible temporary difference, and the tax Non-controlling interests that are present ownership law restricts the utilisation of losses to deduction interests and entitle their holders to a proportionate against income of a specific type (e.g. capital share of the entity’s net assets in the event of liquidation losses can only be set off against capital gains), an may be initially measured either at fair value or at the entity assesses a deductible temporary difference non-controlling interests’ proportionate share of the in combination with other deductible temporary recognised amounts of the acquiree’s identifiable net differences of that type, but separately from other assets. The choice of measurement basis is made types of deductible temporary differences; on a transaction-by-transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable, on the basis specified in another 3. The estimate of probable future taxable profit IFRS. may include the recovery of some of an entity’s assets for more than their carrying amount if there 2.4 Changes in accounting policy and is sufficient evidence that it is probable that the disclosures entity will achieve this; and

Amendments to IFRSs that are mandatorily 4. In evaluating whether sufficient future taxable effective for annual periods beginning on or profits are available, an entity should compare after 1 January 2017 the deductible temporary differences with future The amendments generally require full retrospective taxable profits excluding tax deductions resulting application (i.e. comparative amounts have to from the reversal of those deductible temporary be restated), with some amendments requiring differences. retrospective application. ‚‚ Amendments to IAS 7 disclosure initiative; The amendments apply retrospectively. The directors ‚‚ Amendments to IAS 12 Recognition of Deferred consider that there has been no significant impact Tax Assets for unrealised losses; and of the changes on the results for the year ended 31 ‚‚ Amendments to IFRS 12 included in Annual December 2017. Improvements to IFRS Standards 2014 – 2016 cycle.

Amendments to IAS 7 Disclosure Initiative (effective for annual periods beginning on or after 1 January 2017) The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both cash and non-cash changes. The amendments apply prospectively.

Entities are not required to present comparative information for earlier periods when they first apply the amendments.

Amendments to IAS 12 Recognition of deferred tax assets for unrealised losses (effective for annual periods beginning on or after 1 January 2017) The amendments clarify the following:

1. Unrealised losses on a debt instrument measured at fair value for which the tax base remains at cost given rise a deductible temporary difference, irrespective of whether the debt instrument’s holders expects to recover the carrying amount

Annual Report and Consolidated Financial Statements 32 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Ü

e not yet effective. A debt instrument the collect to is objective whose model business that (i) is contractual cash held flows and (ii) within has contractual cash a flows that are solely payments of principal on the principal amount outstanding and interest must at be amortised measured cost (net of any write down for impairment), unless the asset is designated at fair value through profit(FVTPL) under the fair value option. or loss at All other debt instruments must be measured FVTPL. All equity investments are to the be statement of measured financial position in at fair value, loss or profit in recognised losses and gains with for held not is investment equity an if that except recognised consideration contingent nor trading, in a business combination to by an acquirer which IFRS 3 applies, an to measure can be made at initial recognition irrevocable election the investment at FVTOCI, with dividend income or loss. in profit recognised ‚ ‚ ‚ in 2014), which contains the requirements for a) the classification and measurement of financialand assets financial liabilities, b) impairment methodology, and c) general hedge accounting. IFRS 9 (as revised in 2014) will Financial Instruments: Recognition and Measurement supersede IAS 39 upon its effective date. ‚ ‚ ‚ Phase 1: Classificationfinancial assets and financial liabilities and measurementWith of respect to the classification and measurement, the number of categories of financialassets IFRS under 9 has been reduced, all assets that recognised are currently within financial the scope of IAS 39 will be subsequently measured at either cost or fair value under IFRS 9. Specifically: amortised IFRS 12 states that an entity need not provide summarised summarised an entity need not provide IFRS 12 states that associates in subsidiaries, for interests financial information classified (or included in a disposal that are or joint ventures classified) as held for sale. Consolidated that is that this is the only concession from The amendments clarify of IFRS 12 for such interests. requirements the disclosure The amendments apply retrospectively. Details Annual Report and Consolidated Financial Statements For the year ended 31 December 2017

Clarification of the scope of Clarification of the the Standard Subject of amendment The 2014 – 2016 annual cycle improvements includes amendments to a number of IFRSs, one Amendments to IAS 40 transfers of investment property; cycle; -2016 2014 IFRS to improvements Annual and and transactions currency 22 foreign IFRS advance consideration IFRS 16 leases; Amendments to based payment of share measurement IFRS 2 transactions; classification and or 28 sale and IAS IFRS 10 Amendments to contribution of Assets between an Investor and its associate or Joint Venture; IFRS 9 financial instruments IFRS 15 revenue from contracts with customers clarifications and the related 33 Standard IFRS 12 Disclosure of interests in other entities ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ *The IASB has also issued Amendments to IFRS 4 ‘Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts’, which is effectiveperiods for annual beginning on however, it or is not after applicable to 1 International Holdings Limited as the Consolidated GAAP does not issue January 2018; any insurance contracts. The Consolidated has not in this issue. early adopted any of these standards In July 2014, the IASB finalised the reform of financial In July 2014, the IASB finalised the revised (as 9 IFRS issued and accounting instruments in 2014) IFRS 9 Financial Instruments (as revised (effective for annual periods beginning on or after 1 January 2018) Amendments to IFRS 12 included in the 2014 – 2016 annual improvements 2017) on or after 1 January beginning annual periods cycle (effective for of which is effective for annual periods beginning on or after 1January 2017. See section 1B below for that ar other amendments included in this package a summary of the There has been no impact from the changes on the from has been no impact There 2017. financial statements as at 31 December New and revised IFRSs effective that (but are allow not and earlynew of list a is mandatorily Below 2017. December 31 ending application) for the year revised IFRSs that are not yet mandatorily effective (but allow early application) for the year December 2017*: ending 31 NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued) 2.4 Changes in accounting policy and disclosures (continued)

Ü IFRS 9 also contains requirements for the without applying the other requirements in IFRS 9; classification and measurement of financial liabilities and and derecognition requirements. One major change from IAS 39 relates to the presentation of changes 2. Hedge accounting, for which an entity may in the fair value of a financial liability designated as at choose to continue to apply the hedge accounting FVTPL attributable to changes in the credit risk or that requirements of IAS 39 instead of the requirements liability. Under IFRS 9, such changes are presented in of IFRS 9. other comprehensive income, unless the presentation of the effect of the change in the liability’s credit risk in IFRS 9 contains specific transitional provisions for i) other comprehensive income would create or enlarge classification and measurement of financial assets; an accounting mismatch in profit or loss. Changes ii) impairment of financial assets; and iii) hedge in fair value attributable to a financial liability’s credit accounting. Please see IFRS 9 for details. risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the The Bank is currently in the process of completing fair value of the financial liability designated as FVTPL its implementation of IFRS 9. Though the Bank is presented in profit or loss. has assessed the transitional impact of IFRS 9, the Bank is yet to complete the process of finalizing Phase 2: Impairment of financial assets the transitional impact. The Bank is currently in the The impairment model under IFRS 9 reflects expected final stages and is currently testing for stability and credit losses, as opposed to incurred credit losses adequate sophistication, and carrying out a parallel under IAS 39. Under the impairment approach in run. IFRS 9, it is no longer necessary for a credit event to have occurred before credit losses are recognised. IFRS 15 Revenue from Contracts with Customers Instead, an entity always accounts for expected credit (effective for annual periods beginning on or after losses and changes in those expected credit losses. 1 January 2018) The amount of expected credit losses should be IFRS 15 establishes a single comprehensive model updated at each reporting date to reflect changes in for entities to use in accounting for revenue arising credit risk since initial recognition. from contracts with customers. It will supersede the following revenue Standards and Interpretations upon Phase 3: Hedge accounting its effective date: The general hedge accounting requirements of ‚‚ IAS 18 Revenue; IFRS 9 retain the three types of hedge accounting ‚‚ IAS 11 Construction Contracts; ‚‚ IFRIC 13 Customer Loyalty Programmes; mechanisms in IAS 39. However, greater flexibility ‚ has been introduced to the types of transactions ‚ IFRIC 15 Agreements for the Construction of Real Estate; eligible for hedge accounting, specifically broadening ‚‚ IFRIC 18 Transfers of Assets from Customers; the types of instruments that qualify as hedging and instruments and the types of risk components of non- ‚‚ SIC 13 Revenue-Barter Transactions involving financial items that are eligible for hedge accounting. advertising services In addition, the effectiveness is no longer required. For more disclosure requirements about an entity’s risk As suggested by the title of the new Revenue management activities have been traduced. Standard, IFRS 15 will only cover revenue arising from contracts with customers. Under IFRS 15, a customer The work on macro hedging by the IASB is still at of an entity is a party that has contracted with the a preliminary stage – a discussion paper was issued entity to obtain goods or services that are an output in April 2014 together preliminary views and direction of the entity’s activities in exchange for consideration. from constituents with a comment period which Unlike the scope of IAS 18, the recognition and ended in October 2014. The project is still under measurement of interest income and dividend income analysis at the time of writing. from debt and equity investments are no longer within the scope of IFRS 15. Instead, they are within the Transitional provisions scope of IAS 39 (or IFRS 9 if it is early adopted). IFRS 9 (as revised in 2014) is effective for annual periods beginning on or after 1 January 2018 with As mentioned above, the new Revenue Standard has earlier application permitted. If an entity elects to apply a single model to deal with revenue from contracts IFRS 9 at the same time, except for those relating to: with customers. Its core principle is that an entity should recognise revenue to depict the transfer 1. The presentation of fair value gains and losses of promised goods or services to customers in an attributable to changes in the credit risk of amount that reflects the consideration to which the financial liabilities designated as at FVTPL, the entity expects to be entitled in exchange for those requirements for which an entity may early apply goods or services.

Annual Report and Consolidated Financial Statements 34 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Ü

( ) STEP 5 STEP 4 Its ongoing activities significantly are change expected functionality of the IP or the to formbenefit obtain to customer the to ability The or the from the IP is substantially derived from or dependent upon those activities. i. ii. illustrative factors for consideration in assessing whether the promised goods distinct. or services are IAS 17 leases; IFRIC 4 determining whether an contains a lease; arrangement SIC-15 operating leases – incentives; and SIC-27 evaluating the substance of transactions involving the legal form of a lease. Principal versus clarifying that an agent entity should assess whether for each distinct good it is a principal or agent considerations; by or service promised to the to assess the indicators and reframing amending customer, and by and whether an entity is a principal or agent; Licensing application guidance: in determining whether the license grants customers to use a the underlying right intellectual property (“IP”) (which would result in recognition) point or a in right to time an access time), over recognition the revenue in revenue result would IP (which determine whether; to entity is required ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ Directors are yet to quantify the future impact on yet to quantify the future are Directors the financial statements of the entitychanges in accounting standards. on the above Identification of a lease IFRS 16 applies a control model to the identification of leases, distinguishing between leases and service Directors are yet to quantify the future impact on to quantify the future yet are Directors the financial statements of the entitychanges in accounting standards. on the above IFRS 16 Leases (effectivebeginning on or after 1 January 2019). for annual periods IFRS 16 provides the identification a of lease comprehensive treatment in arrangementsthe financial statements of both model lessees their and for and lessors. It will supersede the following upon its effective date: interpretations lease standard and

STEP 3 STEP 2 Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 STEP 1 Identify performance obligations; by providing When costs incurred to obtain a an as contract recognised be can contract a fulfil to costs and asset. When the transaction price includes a variable consideration element, how it amount and timing of to revenue be recognised. will affect the The concept of variable consideration is broad; a transaction price is considered variable to due discounts, rebates, refunds, concessions, incentives, performance credits, bonuses, price penalties and The new standard contingency introduces for variable a consideration highly is it to that arrangements. extent high the be to only is, recognised that – as hurdle revenue probable that significantreversals in the amount of cumulative revenue recognised will not occur variable the with associated uncertainty the when consideration is subsequently resolved. Whether the be to each performance obligation should transaction process recognised as revenue over time or at a allocated point in revenue recognises entity an 15, IFRS Under time. when a performance which is when ‘control’ of the goods or services obligation is obligation underlying the particular performance satisfied, is transferred to the customer. Unlike the IAS 18, new Standard does not guidance include for separate ‘sale of of services’ goods’ rather the and new entities Standard ‘provision to requires assess whether revenue time in should point particular a or time over recognised be of ‘sales to relates revenue whether of regardless of services’. goods ‘or ‘provision Whether or not a contract (or a combination of contracts) contains more than good one or promised service, and the if promised so, goods when unbundled. or and services how should be 35 ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ In April 2016, the IASB issued clarifications to IFRS 15 IFRS to clarifications issued IASB the 2016, April In in response to feedback received by the IASB/FASB Joint Transition Resource Consolidated for Revenue Recognition, which was formed to address potential 15 IFRS of implementation the with associated issues and the US GAAP equivalent, ASC topic 606. The areas: Clarification to IFRS 15 clarified the following Far more prescriptive guidance has been introduced Standard: by the new Revenue

and measurement: recognition to revenue a 5 step approach introduces Standard The new Revenue NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued) 2.4 Changes in accounting policy and disclosures (continued)

Ü transactions on the basis of whether there is an IFRS 15 at or before the date of initial application of identified asset controlled by the customer. Control is IFRS 16. A lessee can apply IFRS 16 either by a full considered to exist if the customer has: retrospective approach or a modified retrospective a. The right to obtain substantially all of the approach. If the latter approach is selected, an entity economic benefits from the use of an identified is not required to restate the comparative information asset, and and the cumulative effect of initially applying IFRS 16 must be presented to opening retained earnings (or b. The right to direct the use of that asset. other component of equity as appropriate)

The standard provides detailed guidance to determine Directors are yet to quantify the future impact on whether those conditions are met, including instances the financial statements of the entity on the above where the supplier has substantive substitution rights, changes in accounting standards. and where the relevant decisions about how and for what purpose the asset is used are predetermined. Amendments to IFRS 2 Classification and Management of Share-based Payment Directors are yet to quantify the future impact on Transactions (Effective for manual periods the financial statements of the entity on the above beginning on after 1 January 2018) changes in accounting standards. The amendments clarify the following: Lessee accounting 1. In estimating the fair value of cash-settled share- IFRS 16 introduces significant changes to leases based payment, the accounting for the effects of accounting: it removes the distinction between vesting and non-vesting conditions should follow operating and finance leases under IAS 17 and the same approach as for equity-settled share- requires a lessee to recognise a right – of – use asset based payments. and a lease liability at lease commencement for all leases, except for short-term leases and leases of low 2. Where tax law or regulations requires an entity to value assets. withhold a specified number of equity instruments equals to the monetary value of the employee’s tax The right-of-use asset is initially measured at cost and obligation to meet the employee’s tax liability which subsequently measured at cost (subject to certain is then remitted to the tax authority (typically in exceptions) less accumulated depreciation and cash), i.e. the share-based payment arrangement impairment losses, adjusted for any remeasurement of has a net settlement feature such an arrangement the lease liability. The lease liability is initially measured should be classified as equity-settled in its entirely, at the present value of the lease payments that are provided that the share-based payment would not paid at that date. Subsequently, the lease liability have been classified as equity-settled had it not is adjusted for interest and lease payments, as well included the net settlement feature. as the impact of lease modifications, amongst others.

3. A modification of a share-based payment that If a lessee elects not to apply the general requirements changes the transaction from cash-settled to of IFRS 16 to short-term leases (i.e. one that does not include a purchase option and had a lease term at equity-settled should be accounted for as follows: commencement date of 12 months or less) and leases of low value assets, the lessee should recognise the i. The original liability is derecognised lease payments associated with those leases as an i. The equity-settled share-based payment expense on either a straight-line basis over the lease is recognised at the modification date fair term or another systematic basis, similar to the current value of the equity instrument granted to accounting for operating leases. the extent that services have been rendered up to the modification date; and Lessor accounting In contrast to lessee accounting, the IFRS 16 lessor i. Any difference between the carrying amount accounting requirements remain largely unchanged of the liability at the modification date and from IAS 17, which continue to require a lessor to the amount recognised in equity should be classify a lease either as an operating lease or a recognised in profit or loss immediately. finance lease. In addition, IFRS 16 also provides The changes are effective for annual reporting periods guidance on the accounting for sale and leaseback beginning on or after 1 January 2018 with earlier transactions. Extensive disclosure are also required application permitted. Specific transition provisions by the new Standard. IFRS 16 is effective for reporting apply. Directors are yet to quantify the future impact periods beginning on or after 1 January 2019 with on the financial statements of the entity on the above early application permitted for entities that apply changes in accounting standards.

Annual Report and Consolidated Financial Statements 36 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Ü the definition ofby observable investment evidence that a property change occurred. in The supported use amendments has further clarify situations that listed the in IAS 40 under for properties in use is possible that a change are not exhaustive and construction (i.e. a change in use completed properties.) is not limited to The amendments are effectivebeginning for on annual or periods after 1 application January 2018 with permitted. earlier amendments either retrospectively (if this is Entities possible Specific prospectively. or hindsight) of use the without can apply apply. transition provisions the impact on yet to quantify the future are Directors the financial statements of the entity changes in accounting standards. on the above IFRS 2014-2016 Cycle to Annual improvements after or on beginning periods annual for (Effective 1 January 2018) The Annual Improvements include amendments to a number of IFRSs, which have been below. summarised The package to IFRS also 12 Disclosure of includes interests in Other amendments Entities, which is effective for annual periods beginning on or after 1 January 2018.

Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Gains and losses from downstream transactions downstream from losses and Gains involving assets that between an investor constitute and its associate a or venture joint business should be financial statements. investor’s recognised in full in the Gains and losses resulting from transactions from resulting Gains and losses involving assets business that between an investor and its associate do or joint not venture are recognised to the constitute extent of unrelated investors’ a interest in the associate or joint venture. 37 ‚ ‚ ‚ ‚ Directors are yet to quantify the future impact on to quantify the future yet are Directors the financial statements of the entitychanges in accounting standards. on the above the following: IFRS 10 has been amended to reflect the loss of control from Gains or losses resulting a business in of a subsidiary that does not contain a transaction with an associate that or is accounted a for joint using the venture equity recognised method, in are the parent’s profit or loss onlyextent to the of the unrelated investors’ associate or joint venture. gains interests Similarly, and losses in that resulting from an become the has (that subsidiary former any in retained measurement using for or accounted is that venture joint a or associate investments the equity method) to fair value are recognised in the profit or lossformer onlyparent’s to the extent of the unrelated investors’ interests in the new associate or joint venture. In December 2015, the IASB postponed the effective date amendment indefinitely pending theof outcome its research project accounting. Earlier application of these on amendments future the the quantify to yet are equity Directors permitted. still is method of the on entity the of statements financial the on impact above changes in accounting standards. or from to, 40 Transfers IAS Amendments to Investment Property (Effective for annual periods beginning on or after 1 January 2018) The amendments clarify that a transfer to, or investment from, property necessitates an assessment of whether a property meets, or has ceased to meet

Amendments of IFRS 10 and IAS 28 Sale or and IAS 28 Sale of IFRS 10 Amendments Contribution of Assets between its Associate an or Joint investor determined) be to date Venture a after or (Effectiveon and beginning periods for annual The amendments deal with situations where there is a sale or contribution of assets between an investor and its associate or joint IAS venture 28 and IFRS 10 as follows: amended, are the following: to reflect IAS 28 has been amended NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued)

2.4 Changes in accounting policy and disclosures (continued) Ü Standards Subject of amendment Details IFRS 1 Deletion of short –term The amendments delete certain short-term exemptions in First-time exemptions for first-time IFRS 1 because the reporting period to which the exemptions Adoption of adopters applied have already passed. As such, these exemptions are International no longer applicable. Financial Reporting Standards

IAS 28 Measuring an associate The amendments clarify that the option for a venture capital Investments or joint venture at fair organisation and other similar entities to measure investments in Associates value in associates and joint venture at FVTPL is available separately and Joint for each associate or joint venture, and that election should be Ventures made at initial recognition of the associate or joint venture.

In respect of the option for an entity that is not an investment entity (IE) to retain the fair value measurement applied by its associates and joint ventures that are IEs when applying the equity method, the amendments make a similar clarification that this choice is available for each IE associate or joint venture.

The amendments apply retrospectively with earlier application permitted.

Directors are yet to quantify the future impact on the financial statements of the entity on the below changes in accounting standards.

IFRIC 22 Foreign Currency Transactions and 2.5 Foreign currency translation Advance Consideration (Effective for annual periods beginning on or after 1 January 2018) a. Functional and presentation currency IFRIC 22 addresses how to determine the date Items included in the consolidated and separate’s of transaction for the purpose of determining the financial statements are items/transactions exchange rate to use on initial recognition of an asset, measured using the currency of the primary expense or income, when consideration for that item economic environment in which the entity has been paid or received in advance in a foreign operates (‘the functional currency’). The currency which resulted in the recognition of a non- consolidated and separate financial statements monetary asset or non-monetary liability (for example, are presented in Uganda shillings and figures are a non-refundable deposit or deferred revenue). stated in thousands of Uganda shillings.

The Interpretation specifies that the date of transaction b. Transactions and balances is the date on which the entity initially recognises the Transactions in foreign currencies are initially non-monetary asset or non-monetary liability arising recorded at their respective functional currency from the payment or receipt of advance consideration. spot rates at the date the transaction first If there are multiple payments or receipts in advance, qualifies for recognition. the Interpretation requires an entity to determine the date of transaction for each payment or receipt of advance consideration. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency The Interpretation is effective for annual periods spot rates of exchange at the reporting date. beginning on or after 1 January 2018 with earlier Differences arising on settlement or translation of application permitted. Entities can apply the monetary items are recognised in profit or loss. Interpretation either retrospectively or prospectively. Specific transition provisions apply to prospective Non-monetary items that are measured in terms of application. Directors are yet to quantify the future historical cost in a foreign currency are translated using impact on the financial statements of the entity on the the exchange rates at the dates of the recognition. below changes in accounting standards. Non-monetary items measured at fair value in a

Annual Report and Consolidated Financial Statements 38 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Ü Its value changes financial rate, interest specified a in change in response instrument to price, commodity price, foreign the exchange rate, index of prices credit or rates, rating or variable, provided credit in the index, case of financial or a variable non- other that the variablespecific to a party to the contract (aka is not the ‘underlying’). It requires no an initial initial net net investment investment than would be that or required for other is types of smaller contracts that would be expected to have a similar response to changes in factors. market date. It is settled at a future those that immediately or in the the short term, which are Bank that those and trading, for held as classified intends to designates recognition initial upon Bank the sell or loss; profit as at fair value through recognition initial upon Bank the that Those or designates as available-for-sale; recover not may holder the which for Those substantially all of deterioration. other than because of credit its initial investment, Loans and cash the is which – value fair at recognised receivables the consideration to originate or purchase are loan including any transaction costs – and initially subsequently at amortised cost measured using the effective interest method,impairment. The rateeffective (EIR) interest less a. b. c. a. b. c. Derivatives recorded at fair value through fair value through at recorded Derivatives or loss profit A derivative other is contract with all a characteristics: three of financial the following instrument or Loans and receivables financial non-derivative are receivables and Loans assets with fixed or determinable payments that not quoted in an active market, other than: are b. The Bank enters into various derivative counterparties. transactions These with Spot include undelivered and Derivatives forward are recorded at fair value and foreign carried as liabilities as and positive is value fair their when exchange assets contracts. when their fair value is negative. The Derivative instruments are held for non-hedging purposes and are not applied counterparties thus the Consolidated has principally executed for Hedge accounting. other c. financial assets classified as held Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Financial assets Sale and repurchase agreements Sale and repurchase Financial assets at fair value through profit or loss This category comprises two sub- categories: for trading, and financial assets designated by the Bank as at fair value through profit orupon initial recognition. loss 39 2.7 following the in assets financial its classifies Bank The categories: financial assetsprofit or loss, loans andreceivables, held-to-maturity at fair valueand through available-for-sale financial assets. The directors determine the classification ofat its initial financial recognition. assets accounting for The regular way contracts when recording Bank uses financial asset transactions. trade date a. A financial asset isclassified as held for trading if principally for the purpose of or incurred is acquired it selling it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking.assets Financial at fair value through profit orloss are carried in the statement of financial position at fair value with net changes in fair value presented as finance costs (negative net changes in fair value) or finance income loss. or profit the in value) fair in changes net (positive 2.6 Securities sold subject to in the financial statementsreclassified as are (‘repos’) repurchase agreements pledged assets when the transferee has the right by contract or custom to sell or repledge the collateral; deposits from the counterparty liability is included in banks or deposits from customers, as appropriate. to resell agreements under Securities purchased as loans and advances recorded are repos’) (‘reverse to other banks or customers, as appropriate. The difference between sale repurchase and is price treated as interest and accrued the agreements over using the the effective interest life method. of in also retained Securities lent to counterparties are the financial statements. foreign foreign currency are translated using the The measured. is exchange value fair the when date the at rates of non-monetary arising on translation gain or loss items at measured fair value is in treated line with the change in fair gain or loss on the of the recognition value of the item (i.e., translation ondifferences items whose fair value gain or loss is recognised in OCI or profit or loss are alsorecognised in OCI or profit or loss, respectively). at historical measured that are Non–monetary items the using translated are currency foreign a in cost as at the date of recognition. spot exchange rates NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued) 2.7 Financial Assets (continued)

Ü is the rate that exactly discounts estimated Loans and borrowings, and payables future cash payments or receipts through After initial recognition, deposits due to other banks, the expected life of the financial instrument Customer deposits, Refinance loans, and other or, when appropriate a shorter period, to liabilities are subsequently measured at amortised the net carrying amount of the financial cost. The interest bearing refinance loans use the asset or financial liability. EIR method to determine the amortised cost. Gains and losses are recognised in profit or loss when the The amortised cost of a financial asset or liabilities are derecognised as well as through the EIR financial liability is the amount at which amortisation process. the financial asset or financial liability is

measured at initial recognition minus Effective Interest method principal repayments, plus or minus the The effective interest method is a method of calculating cumulative amortisation using the effective the amortised cost of a debt instrument and of interest method of any difference between allocating interest income over the relevant period. that initial amount and the maturity amount, The effective interest rate is the rate that exactly and minus any reduction (directly or discounts estimated future cash receipts (including all through the use of an allowance account) fees and points paid or received that form an integral for impairment or uncollectibility. part of the effective interest rate, transaction costs and The financial assets under this category are other premium or discounts) through the expected loans and advances to customer life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial

recognition. d. Held-to-maturity investments Held-to-maturity investments are non-derivative Income is recognised on an effective interest basis for financial assets with fixed or determinable debt instruments other than those financials assets payments and fixed maturities that the directors classified as at FVTPL have the positive intention and ability to hold to

maturity, other than: Amortised cost is calculated by taking into account a. Those that the Bank upon initial recognition any discount or premium on acquisition and fees or designates as at fair value through profit or costs that are an integral part of the EIR. The EIR loss; amortisation is included as finance costs in the profit b. Those that the Bank designates as or loss. available-for-sale; and In order to show how fair values have been derived, c. Those that meet the definition of loans and financial instruments are classified based ona receivables. hierarchy of valuation techniques, as summarised below: Held-to-maturity investments are initially recognised at ‚‚ Level 1 financial instruments − those where fair value including direct and incremental transaction the inputs used in the valuation are unadjusted costs and measured subsequently at amortised cost, quoted prices from active markets for identical using the effective interest method. assets or liabilities that the Bank has access to at the measurement date. The Bank considers markets as active only if there are sufficient 2.8 Financial liabilities trading activities with regards to the volume and liquidity of the identical assets or liabilities and Initial recognition and measurement when there are binding and exercisable price Financial liabilities are classified, at initial recognition, quotes available on the reporting date. as loans and borrowings or as payables.

‚‚ Level 2 financial instruments− those where All financial liabilities are recognised initially at fair the inputs that are used for valuation and are value and, in the case of loans and borrowings and significant, are derived from directly or indirectly payables, net of directly attributable transaction costs. observable market data available over the entire The group’s financial liabilities include Deposits due period of the instrument’s life. Such inputs include to other banks, Customer deposits, Refinance loans, quoted prices for similar assets or liabilities and other liabilities. in active markets, quoted prices for identical instruments in inactive markets and observable Subsequent measurement inputs other than quoted prices such as interest The measurement of financial liabilities depends on rates and yield curves, implied volatilities, and their classification, as described below: credit spreads. In addition, adjustments may

Annual Report and Consolidated Financial Statements 40 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Ü

Impairment of financial assets of financial Impairment 2.8.2 Assets carried at amortised cost at amortised Assets carried The Bank assesses at each reporting date whether there is objective evidence financial that A impaired. a is assets financialfinancial of assetConsolidated or impaired is assets financial of Consolidated a or asset is only if there incurred are and impairment losses or one of result a as impairment of evidence objective more events that occurred after the initial recognition of the asset (a ‘loss event’) and that events) loss has event an impact (or on the estimated future cash financial of Consolidated or asset financial the of flows estimated. reliably assets that can be The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, individually not are that assets financial for collectively and individually or significant. If the Bank determines that no objective evidence of impairment assessed financial asset, whether significant or not, exists it for assets financial of Consolidated an a in asset the includes individually with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment be to continues or is loss impairment an which for and assessment collective a in included not are recognised of impairment. The calculation of the present value of the estimated future cash flows of a collateralised financial assetreflects the cash flows that may result less costs for obtaining and selling foreclosure from is probable. the collateral, whether or not foreclosure For the purposes basis the on grouped are assets financial impairment, of a of collective similar credit risk evaluation characteristics (that basis of is, of on the Bank’s the grading process that considers asset type, geographical industry, location, collateral type, past-due status and of estimation the to relevant are characteristics Those other relevant factors). future cash flows for groups of such assets by being indicative of the debtors’ ability to pay to the contractual terms of the assets all due according amounts being evaluated. assets financial of Consolidated a in flows cash Future that are collectively evaluated estimated on the basis of for the contractual cash flows impairment are of the assets in the Consolidated and historical loss experience for assets with credit risk characteristics similar to those loss experience is in adjusted on the the basis of observable current Consolidated. data to Historical reflectconditions that did not affect the period on which the the effectshistorical loss experience is based the and to remove current of effects of conditions in the historical period that do exist. not currently Annual Report and Consolidated Financial Statements For the year ended 31 December 2017

Derecognition Level 3 financial instruments − those that include that those − instruments financial 3 Level significant is that input unobservable more or one as whole. to the measurement be required for the condition or location of the for the condition or be required asset or the extent to which it relates to that items are comparable to the valued instrument. However, if such adjustments unobservable inputs which are are significant to the based on entire measurement, the Bank will classify the 3. instruments as Level 41 ‚ ‚ The Bank periodically reviews its valuation techniques valuation its reviews periodically Bank The model and methodologies adopted the including the calibrations. base However, models may not fully capture all factors relevant to (CVA), risk credit as such instruments financial the Bank’s valuation of the and/or funding costs (FVA). (DVA) own credit Therefore, the Bank applies various estimate techniques the to credit risk associated with its financial instruments measured at fair value, which include expected a the estimates that approach portfolio-based net exposure per counterparty over the full lifetime of the individual assets, in order to reflect the credit risk of the individual counterparties for non-collateralised financial instruments. TheBank estimates the value of its own credit from market observable data, such and the credit as secondary prices for its traded debt spread on credit default swaps and traded debts on itself. The Bank evaluates the levelling at basis and period on an instrument-by-instrument each reporting the on based necessary when instruments reclassifies period. facts at the end of the reporting

Financial these assets from flows cash the receive to rights contractual are assets derecognised have ceased to exist or the assets have been when and transferred substantially all the risks and rewards the is, (that transferred also are assets the of ownership of been not have rewards and risks the all substantially if transferred, the Bank tests control continuing involvement to on the ensure basis of that any retained derecognition). does not prevent powers of control obligation the when derecognised is liability financial “A or cancelled or discharged is liability under the When expires. an existing financial liabilityreplaced is the same lender on substantially by another from different terms, or the terms are substantially of an existing liability modified, suchmodification is treated an exchangeas derecognitionthe or original liability and the of the recognition of a new liability. The difference in therespective carrying amounts is or loss.” in the profit recognised 2.8.1

NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued) 2.7 Financial Liabilities (continued)

Ü Estimates of changes in future cash flows for groups intention to settle on a net basis or realise the asset of assets should reflect and be directionally consistent and settle the liability simultaneously. with changes in related observable data from period to period (for example, changes in unemployment rates, 2.10 Cash and cash equivalents property prices, payment status, or other factors Cash and cash equivalents include cash in hand, indicative of changes in the probability of losses in the deposits held at call with banks and other short-term Consolidated and their magnitude). The methodology highly liquid investments with original maturities of and assumptions used for estimating future cash three months or less. flows are reviewed regularly by the Consolidated to reduce any differences between loss estimates and For the purposes of the statement of cash flows, actual loss experience. cash and cash equivalents comprise balances with less than three months` maturity from the date When a loan is uncollectible, it is written off against of acquisition, including cash with central banks, the related allowance for loan impairment. Such loans treasury bills and other eligible bills, loans and are written off after all the necessary procedures have advances to banks, amounts due from other banks been completed and the amount of the loss has been and government securities. Cash and cash equivalent determined. Impairment charges relating to loans and exclude the cash reserve requirement held with the advances to banks and customers are recognised in Bank of Uganda. loan impairment charges in profit or loss. 2.11 Property and equipment If, in a subsequent period, the amount of the Property and equipment comprise mainly office impairment loss decreases and the decrease can equipment, computer hardware, furniture & fittings be related objectively to an event occurring after the and leasehold land. All equipment and land used by impairment was recognised (such as an improvement the Bank is stated at historical cost less depreciation. in the debtor’s credit rating), the previously recognised Historical cost includes expenditure that is directly impairment loss is reversed by adjusting the allowance attributable to the acquisition of the items. account. The amount of the reversal is recognised in profit or loss. Subsequent expenditures are included in the asset’s carrying amount or are recognised as a separate asset, In addition to the measurement of impairment as appropriate, only when it is probable that future losses on loans and advances in accordance with economic benefits associated with the item will flow International Financial Reporting Standards as set to the Bank and the cost of the item can be measured out above, the Bank is also required by the Ugandan reliably. The carrying amount of the replaced part is Financial Institutions Act, 2004 to estimate losses on derecognised. All other repair and maintenance costs loans and advances as follows: are charged to profit or loss during the financial period in which they are incurred. A specific allowance for impairment for those loans and advances considered to be non-performing Buildings are measured at fair value and in case based on criteria and classification of such loans and for the building, less accumulated depreciation advances established by the Financial Institutions and impairment losses recognised at the date of (Credit Classification and Provisioning) Regulations, revaluation. Valuations are performed with sufficient 2 0 0 5 , a s f o l l o w s : frequency to ensure that the carrying amount of a a. Substandard assets with arrears period between revalued asset does not differ materially from its fair 90 and 179 days – 20%; value. b. Doubtful assets with arrears period between 181 days and 365 days – 50% and A revaluation surplus is recorded in OCI and credited c. Loss assets with arrears period over 365 days – to the asset revaluation surplus in equity. However, to 100%. the extent that it reverses a revaluation deficit of the same asset previously recognised in profit or loss, the The excess of provisions as per Financial Institutions increase is recognised in profit and loss. A revaluation (Credit Classification and Provisioning) Regulations, deficit is recognised in the statement of profit or loss, 2005 over IFRS is accounted for in the credit risk except to the extent that it offsets an existing surplus reserve in the statement of changes in equity. on the same asset recognised in the asset revaluation surplus. 2.9 Offsetting financial instruments Financial assets and liabilities are offset and the An annual transfer between retained earnings and net amount reported in the statement of financial revaluation reserves is made for the difference position when there is a currently enforceable legal between depreciation based on the revalued carrying right to offset the recognised amounts and there is an amount of the asset and depreciation based on

Annual Report and Consolidated Financial Statements 42 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Ü It is technically feasible to complete the software software the complete to feasible technically is It use; be available for so that it will product Management intends to complete the software use or sell it; and product There is an ability to use product; or sell the software It can be product will generate probable future demonstrated economic how benefits; the software resources other and financial technical, Adequate to complete the development and to use or sell and available; are product the software The expenditure attributable to product during its the development can be software reliably measured. ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ Bank are recognised as intangible assets when the met: are following criteria Directly attributable costs that are capitalised as that are attributable costs Directly part of the software product development include employee the software costs and overheads. portion of relevant an appropriate Other development expenditures that do not these meet criteria are incurred. recognised Development as costs previously an recognised as expense an expense are as not recognised as an asset in subsequent period. Computer development a software costs recognised as assets are amortised over their estimated useful lives, which does not exceed three years. Acquired computer software licences are capitalised and to acquire on the basis of the costs incurred bring to use the specific software. These costs are amortised over the expected useful lives. Software 5 years. has a maximum expected useful life of The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over and the assessed for useful impairment whenever economic there is life an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with at reviewed least at the end of each period. reporting a finite useful lifeChanges are in the expected useful life or the expected pattern of consumption of future economic benefits to modify the considered embodied in the asset are amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the statement of profit or loss in the expense category that is consistent with function of the intangible assets. the of an derecognition Gains or losses arising from intangible asset are between measured as the the difference net disposal proceeds and the 7% Shorter of useful lives and lease terms 12.5% 20.0% 25.0% 33.3% Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Intangible assets 43 Buildings Leasehold improvements Strong Fixtures, Furniture, & Safes room Office Equipment Motor vehicles Computer Equipment, POS & SWIFT ATM, 2.12 Costs associated software programmes are recognised as an expense with as maintaining incurred. Development costs attributable computer to the that design and are testing of directly identifiable and unique software products controlled by the and methods depreciation values, residual assets’ The useful lives and reviewed, are adjusted if appropriate, at the end of changes or events whenever impairment for reviewed each reporting period. the carrying amount indicate that in circumstances Assets are may not be recoverable. disposal on derecognised is equipment and “Property or when no future economic benefitsare derecognition on arising loss or gain Any expected use. its from of the asset (calculated as the amount the carrying and proceeds disposal net the difference between of the asset) is recognised in other operating income in the statement of profit or loss in the year the asset is derecognised. Detailed disclosures are provided in Note 25. determined by Gains and losses on disposals are comparing proceeds with carrying amount. are included in ‘other operating expenses’ in profit or These loss.” The bank assesses the fair value of the buildings at period to determine the the end of each reporting the between difference the If revaluation. of frequency carrying respective their and buildings the of value fair revalued be will buildings the insignificant, is amounts every five years. the asset’s original cost. Additionally, accumulated depreciation as at the revaluation date is eliminated and asset the of amount carrying gross the against the net amount is restated to the revalued of amount the asset. Upon disposal, any revaluation surplus the particular asset being sold is transferred to relating earnings. to retained of assets is calculated using the straight- Depreciation residual their to cost their allocate to method line useful lives, as follows: values over their estimated NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued) 2.12 Intangible Assets (continued)

Ü carrying amount of the asset and are recognised pension insurance plans on a mandatory, contractual in the statement of profit or loss when the asset is or voluntary basis. The contributions are recognised derecognised. as employee benefit expense when they are due. Prepaid contributions are recognised as an asset to 2.13 Impairment of non-financial assets the extent that a cash refund or a reduction in the The Bank assesses, at each reporting date, whether future payments is available. there is an indication that an asset may be impaired. If any indication exists, or when annual impairment b. Retirement benefit obligations testing for an asset is required, the Bank estimates the The Consolidated contributes to the statutory asset’s recoverable amount. An asset’s recoverable National Social Security Fund (NSSF) on behalf of its amount is the higher of an asset’s or CGU’s fair employees. This is a defined contribution scheme value less costs of disposal and its value in use. The registered under the NSSF Act. The group’s obligations recoverable amount is determined for an individual under the scheme are specific contributions legislated asset, unless the asset does not generate cash from time to time and are currently limited to 10% inflows that are largely independent of those from of the respective employees’ salaries. The group’s other assets or group’s assets. contributions are charged to the profit or loss in the year in which they relate. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered 2.15 Provisions impaired and is written down to its recoverable Provisions for restructuring costs and legal claims are amount. recognised when: the Bank has a present legal or constructive obligation as a result of past events; it is In assessing value in use, the estimated future cash probable that an outflow of resources will be required flows are discounted to their present value using a to settle the obligation; and the amount has been pre-tax discount rate that reflects current market reliably estimated. Provisions are not recognised for assessments of the time value of money and the future operating losses. risks specific to the asset. In determining fair value less costs of disposal, recent market transactions Where there are a number of similar obligations, the are taken into account. If no such transactions can likelihood that an outflow will be required in settlement be identified, an appropriate valuation model is used. is determined by considering the class of obligations These calculations are corroborated by valuation as a whole. A provision is recognised even if the multiples, quoted share prices for publicly traded likelihood of an outflow with respect to any one item companies or other available fair value indicators. included in the same class of obligations may be small. Impairment losses of continuing operations are recognised in the statement of profit or loss in Provisions are measured at the present value of the expense categories consistent with the function of expenditures expected to be required to settle the the impaired asset, except for properties previously obligation using a pre-tax rate that reflects current revalued with the revaluation taken to OCI. For such market assessments of the time value of money and properties, the impairment is recognised in OCI up to the risks specific to the obligation. The increase in the the amount of any previous revaluation. provision due to passage of time is recognised as interest expense. 2.14 Employee benefits Provisions are recognised when the Bank has a a. Pension obligations present legal or constructive obligation as a result The Bank operates various pension schemes. The of past events, where it is probable that an outflow schemes are generally funded through payments to of resources embodying economic benefits will be insurance companies or trustee-administered funds, required to settle the obligation, and a reliable estimate determined by periodic actuarial calculations. The of the amount of the obligation can be made. Bank has a defined contribution scheme. A defined contribution plan is a pension plan under which the 2.16 Income tax Bank pays fixed contributions into a separate entity. a. Current income tax The Bank has no legal or constructive obligations to Current tax assets and liabilities for the current and pay further contributions if the fund does not hold prior years are measured at the amount expected to sufficient assets to pay all employees the benefits be recovered from, or paid to, the taxation authorities. relating to employee service in the current and prior The tax rates and tax laws used to compute the periods. For defined contribution plans, the Bank amount are those that are enacted, or substantively pays contributions to publicly or privately administered enacted, by the reporting date in the countries where

Annual Report and Consolidated Financial Statements 44 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Operating lease Leases in which a significant portion of the retained are ownership of rewards and risks by another party, the lessor, are classified as operating leases. Payments, including pre-payments, made leases (net of any incentives received from under operating the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. Refer to note 25. The total payments made under operating leases are charged to expenses’ on a straight-line basis over the ‘other operating period of the lease. When the lease period lease is terminated before an operating has expired, any payment required to be made to the lessor by way recognised of as an expense penalty in the period is in which termination takes place. The leases entered into by the Bank primarily operating leases. are Share capital Share

Dividend payable i. The Bank as the lessee hedges, which are charged or credited to OCI. These OCI. to credited or charged are which hedges, exceptions are subsequently reclassified from OCI to the income statement together with the deferred respective loss or gain. The Bank also recognises the tax consequences of payments and issuing related to costs, financial instruments that areclassified as in equity. directly equity, The Bank only off-sets its tax deferred assets against liabilities when is there both a legal right to offset and intention to settle on a net basis. it is the Bank’s 2.17 in equity to charged are shares ordinary on Dividends declared. they are the period in which 2.18 Ordinary shares are classified aspar the above and over received premium Any ‘share equity. capital’ in value of the is shares classified in as premium’ ‘share equity. The determination of whether an arrangement is lease, or contains a lease, is based on the substance a an assessment of of the arrangement and requires dependent is arrangement the of fulfilment the whether the whether or assets or asset specific a of use the on asset. arrangement conveys a right to use the Leases are divided into finance leases and operating leases. a. 2.19 Leases Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 In respect of associated taxable with temporary investments temporary the of reversal the of timing the where differences in subsidiaries, differences can be controlled andit is probable that the temporary differences will notreverse in future the foreseeable Where Where the deferred tax liability arises from the initial recognition of goodwill or of an business a not is that transaction a in liability asset or combination and, at the time of the transaction, affects neither the accounting profit nor taxable or loss profit Deferred income tax Deferred 45 ‚ ‚ ‚ ‚

reviewed is assets tax deferred of amount carrying The that extent the to reduced and date reporting each at it is no longer probable that sufficient taxable profit will be available to allow all or part tax of asset the to deferred be utilised. Unrecognised deferred date and are at each reporting reassessed tax assets are recognised to the extent that it becomes that probable future taxable profit will allow asset to be recovered. the deferred tax the at measured are liabilities and assets tax Deferred tax rates that are expected to apply in the year when the asset is realised or the liability is settled, or enacted been have that laws) tax (and rates tax based on date. substantively enacted at the reporting The measurement of deferred tax consequences reflects that the would tax follow from in the which manner the Consolidated expects the reporting period at to recover to settle the the carrying end of amounts of its assets and liabilities. income as recognised are taxes deferred and Current tax benefits or expenses remeasurement value fair the to related tax for in except the income statement of available-for-sale differences and assets, the net movement foreign on exchange cash flow Deferred Deferred tax is provided on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial purposes. reporting Deferred tax liabilities are recognised for all taxable except: temporary differences, the Bank operates and generates taxable Current income. income tax in the in equity and not recognised in equity is directly relating to items statement recognised of respect profit orwith loss.returns Management periodically tax the in taken positions evaluates to situations in which applicable tax regulations are subject to interpretation and establishes provisions appropriate. where b. NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued) 2.19 Leases (continued) b. The Bank as the lessor completion of the underlying transaction. Portfolio When assets are leased out under a finance and other management advisory and service fees are lease, the present value of the lease payments recognised based on the applicable service contracts, is recognised as a receivable. The difference usually on a time-apportionate basis. Performance- between the gross receivable and the present linked fees or fee components are recognised when value of the receivable is recognised as unearned the performance criteria are fulfilled. finance income. Lease income is recognised over the term of the lease using the net investment 2.22 Dividend income method (before income tax), which reflects a Dividends are recognised in profit or loss when the constant periodic rate of return. Bank’s right to receive payment is established.

2.20 Interest income and expense 2.23 Acceptances and letters of credit Interest income and expense for all interest-bearing Acceptances and letters of credit are accounted for financial instruments are recognised in profit or loss as off-balance sheet transactions and disclosed as using the effective interest method. contingent liabilities.

The effective interest method is a method of calculating 2.24 Financial guarantee contracts the amortised cost of a financial asset or a financial Financial guarantee contracts are contracts that liability and of allocating the interest income or interest require the issuer to make specified payments to expense over the relevant period. The effective interest reimburse the holder for a loss it incurs because a rate is the rate that exactly discounts estimated future specified debtor fails to make payment when due, in cash payments or receipts through the expected accordance with the terms of a debt instrument. Such life of the financial instrument or, when appropriate, financial guarantees are given to other Banks, financial a shorter period to the net carrying amount of the institutions and other bodies on behalf of customers financial asset or financial liability. When calculating to secure loans, overdrafts and other facilities. the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial Financial guarantees are initially recognised in the instrument (for example, prepayment options) but financial statements at fair value on the date the does not consider future credit losses. The calculation guarantee was given. Subsequent to initial recognition, includes all fees and points paid or received between the Bank’s liabilities under such guarantees are parties to the contract that are an integral part of the measured at the higher of the initial investment, less effective interest rate, transaction costs and all other amortisation calculated to recognise in the income premiums or discounts. statement the fee income earned on a straight line basis over the life of the guarantee and the best Once a financial asset or a Consolidated of similar estimate of the expenditure required to settle any financial assets has been written down as a result of an financial obligation arising at the statement of financial impairment loss, interest income is recognised using position date. the rate of interest used to discount the future cash flows for the purpose of measuring the impairment The Bank’s business involves taking on risks in a loss. targeted manner and managing them professionally. The core functions of the Bank’s risk management 2.21 Fee and commission income are to identify all key risks for the Bank, measure Fees and commissions are generally recognised on these risks, manage the risk positions and determine an accrual basis when the service has been provided. capital allocations. The Bank regularly reviews its risk Loan commitment fees for loans that are likely to management policies and systems to reflect changes be drawn down are deferred (together with related in markets, products and best market practice. direct costs) and recognised as an adjustment to the effective interest rate on the loan. Loan syndication fees are recognised as revenue when the syndication has been completed and the Bank has retained no part of the loan package for itself or has retained a part at the same effective interest rate as the other participants.

Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party – such as the arrangement of the acquisition of shares or other securities, or the purchase or sale of businesses – are recognised on

Annual Report and Consolidated Financial Statements 46 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS of credit risk of a portfolio of estimations as to assets the likelihood of defaults occurring, entails further of default correlations loss ratios and of the associated between counterparties. The Bank has developed quantification models of to the support credit the scoring risk.models are in use for all key credit portfolios These rating and and form the In basis measuring for credit risk measuring of a default loan and counterparty risks. advances level, at of default’ (PD) by the components: (i) the ‘probability the Bank client or considers counterparty on its contractual three obligations; (ii) current exposures to likely the counterparty future and development, its derive from the ‘exposure which at default’ the (EAD); likely and recovery ratio on (iii) Bank the defaulted the obligations (the ‘loss given default’) (LGD). The models are reviewed to regularly monitor their to relative robustness actual to optimise performance and amended as necessary their effectiveness. These required are credit model’), loss ‘expected (the loss expected risk measurements, by the Basel Committee on Banking Regulations and which reflect the Supervisory Practices and (the are embedded Basel in the Committee) Bank’s management. daily operational The operational measurements be contrasted can with impairment allowances required under IAS 39, which are based on losses that have loss ‘incurred (the date reporting the at incurred been model’) rather than expected losses. The Bank’s internal ratings scale external ratings and as supplemented by own the Bank’s mapping of of internal the use rating tools assessment through as follows: are Annual Report and Consolidated Financial Statements For the year ended 31 December 2017

Credit risk measurement risk Credit Credit risk Credit FINANCIAL RISK MANAGEMENT FINANCIAL 47 3.1.1 Loans and advances (including loan commitments and guarantees) The estimation of credit exposure is the requires use of models, as the value of a product complex and varies with changes in market assessment The time. of passage the and flows cash variables, expected 3.1 should loss, financial suffering of risk the is risk Credit any of the counterparties fail to fulfil Bank’s their contractual obligations customers, clients commercial from mainly arises risk Credit Bank. the or to market and cards, credit advances, and loans consumer and activities, lending such from arising commitments loan provided, enhancement credit from arise also can but financial guarantees, letters of credit, endorsements and acceptances. The Bank is also arising from investments in debt securities and other exposed to other exposures arising from its credit trading activities risks (‘trading exposures’), including non-equity trading assets, derivatives portfolio and loans. repurchase market counterparties and reverse settlement balances with Credit risk is the single the manage carefully therefore largest directors the business; risk for the Bank’s exposure to credit risk. management The risk credit risk credit management a in centralised are control and and Management the to reports provides which team, Committees Credit Board 3. aim The is Bank’s to achieve an appropriate balance between risk and adverse effects on return the financial Bank’s performance. and minimise The Bank defines risk potential as the possibility of losses or profits foregone, which may be caused by internal or external factors. Financial Risk Management is overseen by the Risk the Credit by primarily out carried Department and and Departments. Treasury Bank identifies, Treasury evaluates and hedges financial operation operating with risksunits. the The Bank’s Board management, risk closein overall for principles co- written provides as well as written credit risk, policies rate interest risk, exchange foreign covering as such specificareas, risk, use of derivative financial instruments and non- derivative financial instruments. In addition, internal of risk for the independent review audit is responsible environment. management and the control The risks arising from financial instruments to which includes which risks, financial are exposed is Bank the risk. risk, liquidity risk and market credit NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued) 3.1 Credit Risk (continued)

Normal Items that are fully current and the full repayment of the contractual principal and interest amounts are expected. Watch Items for which the borrower is experiencing difficulties. Ultimate loss is not expected but could occur if adverse conditions persist. Substandard Items that show underlying well defined weaknesses that could lead to probable loss if not corrected. The risk that these items may be impaired is probable and the Bank relies to a large extent on the available security. Doubtful Items Items that are considered to be impaired, but are not yet considered final losses because of pending factors, which may strengthen the quality of the items. Loss Items that are considered to be uncollectible and where the realization of collateral and institution of legal proceedings have been unsuccessful. These items are considered of such little value that they should no longer be included in the net assets of the Bank.

3.1.2 Risk limit control and mitigation policies a. Collateral The Bank manages, limits and controls concentrations The Bank employs a range of policies and practices of credit risk wherever they are identified − in to mitigate credit risk. The most traditional of these is particular, to individual counterparties and banks, and the taking of security for loans and advances, which to industries. is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or The Bank structures the levels of credit risk it undertakes credit risk mitigation. by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and The principal collateral types for loans and advances to geographical and industry segments. Such risks are: are monitored on a revolving basis and subject to ‚‚ Mortgages over residential properties. an annual or more frequent review, when considered ‚‚ Charges over business assets such as premises, necessary. Limits on the level of credit risk by product, inventory and accounts receivable industry sector and country are approved quarterly by ‚‚ Charges over financial instruments such as debt the Board of Directors. securities and equities.

The exposure to any one borrower including banks Collateral held and other credit enhancements and brokers is further restricted by sub-limits The Consolidated holds collateral and other credit covering on- and off-balance sheet exposures, and enhancements to customers in the form of mortgage daily delivery risk limits in relation to trading items interests over property, other registered securities such as forward foreign exchange contracts. Actual over assets, and guarantees. Estimates of fair value exposures against limits are monitored daily. Lending are based on the value of collateral assessed at the limits are reviewed in the light of changing market and time of borrowing, and are regularly updated through economic conditions and periodic credit reviews and the life of the credit facility. Collateral requirements assessments of probability of default. are based on the individual risk rating of borrowers as stipulated in the Bank’s policy. The table below Some other specific control and mitigation measures sets out the principal types of collateral held against are outlined below: different types of financial assets.

Percentage Principal type of collateral Type of credit exposure 31 December 2017 31 December 2016 held Derivative assets held for risk management 100% 100% Cash Reverse sale and repurchase agreements 100% 100% Cash Loans and advances to retail customers Secured 29% 43% Unsecured 71% 57% Loans and advances to corporate customers Secured 99% 97% Unsecured 1% 3%

Annual Report and Consolidated Financial Statements 48 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS 100% 100% Ushs ‘000 Ushs ‘000 Collateral over Collateral over 177,902,596 172,881,325 172,881,325 177,902,596 172,881,325 172,881,325 Ushs ‘000 Ushs ‘000 than 100% than 100% 60,499,769 139,848,746 60,499,769 139,848,746 Collateral less Collateral less Collateral Master netting arrangements related Financial covenants (for credit commitments and loan books) b. losses credit to exposure its restricts further Bank The by entering into master netting counterparties arrangements with which with it undertakes a significant volume of transactions. Master netting arrangements do not generally result in liabilities an of offset the of assets statement and of basis settled on a gross either usually transactions are financial position, as or under most netting agreements the right of set off is triggered only on default. However, the credit risk associated with favourable contracts is reduced by a master netting arrangement to the extent that if a default occurs, all amounts with the counterparty are terminated and settled instruments derivative on on risk a credit net to exposure basis. overall The Bank’s subject to master netting arrangements can change substantially within a short period, as it is affected by each transaction subject to the arrangement. c. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans. Documentary written are which – credit of letters commercial and undertakings by the Bank on behalf of a customer Bank the on drafts draw to party third a authorising and terms specific under amount stipulated a to up collateralised by the underlying conditions – are shipments of goods to loan. carry less risk than a direct therefore which they relate and Ushs ‘000 Ushs ‘000 Netting off Netting off Netting off agreements agreements agreements 15,672,437 5,757,188 15,672,437 5,757,188 (cash secured) (cash secured) portfolio portfolio Total loan Total Total loan Total Ushs ‘000 Ushs ‘000 254,074,802 318,487,259 254,074,802 318,487,259 Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Lending limits (for derivatives and loan Lending limits (for derivatives and books) 49 Total Gross loans and Gross advances Total As at 31 December 2016 Gross loans and loans Gross advances As at 31 December 2017 As at 31 December Longer-term finance and lending to corporate entities corporate to lending and finance Longer-term are generally secured; facilities revolving are individual generally credit order to unsecured. minimise the credit In loss the Bank will addition, seek counterparty as soon as the additional collateral from in impairment indicators are identified for the relevant individual loans and advances. a. The Bank maintains strict control limits on net open derivative positions (that is, the difference between purchase and sale contracts) by both amount term. and The amount subject to to credit expected future risk net cash is inflows of limited instruments, which in relation to derivatives of are the only contract, or a notional values fraction used to the express volume of instruments outstanding. This risk credit exposure is managed lending limits with customers, as together with potential part of exposures the from overall market movements. other security Collateral is not or always obtained for credit exposures risk on these instruments, except where the counterparties. margin deposits from Bank requires Settlement risk arises payment in in any cash, situation securities in or the where expectation equities a of is cash, securities a made or corresponding equities. receipt Daily are settlement in established for limits each counterparty Bank’s the from arising to risk settlement all of cover aggregate the market transactions on any single day. Collateral held as security for financial assets other than loansand advances depends on the instrument. nature of the The table below shows the collateral coverage for secured loans as at year-end. The type of collateral mainly. titles and buildings includes land held NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued) 3.1 Credit Risk (continued)

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards (often referred to as financial covenants).

The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.

3.1.3 Impairment and provisioning policies The internal and external rating systems described in Note 3.1.1 focus on expected credit losses – that is, taking into account the risk of future events giving rise to losses. In contrast, impairment allowances are recognised for financial reporting purposes only for losses that have been incurred at the reporting date based on objective evidence of impairment.

Due to the different methodologies applied, the amount of incurred credit losses provided for in the financial statements is usually lower than the amount determined from the expected loss model that is used for internal operational management and banking regulation purposes. The impairment allowance included in the amounts in the statement of financial position at year-end is derived from each of the four internal rating grades.

However, the largest component of the impairment allowance comes from the loss grade. The table below shows the Bank’s exposure on items like financial guarantees, loan commitments and other credit related obligations and the associated impairment allowance for each of the Bank’s internal rating categories.

2017 2016 Credit risk % of impairment provision Credit risk Impairment exposure held per grade exposure allowance Normal 90.85% 0.0% 91.46% 0.0% Watch 5.18% 0.0% 7.01% 0.0% Substandard 3.54% 74.3% 0.15% 3.0% Doubtful 0.33% 17.5% 0.31% 16.0% Loss 0.1% 8.3% 1.07% 81.0% 100.00% 100.00% 100.00% 100.0%

3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements

The directors are confident in the ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both the loans and advances portfolio and debt securities based on the following:

‚‚ 96.00% of the loans and advances portfolio is categorised in the top two grades of the internal rating system (2016: 98.47%) ‚‚ 93.92% of the loans and advances portfolio are considered to be neither past due nor impaired (2016: 91.46%) All credit exposures arise in Uganda. The following table breaks down the Bank’s credit exposure at carrying amounts (without taking into account any collateral held or other credit support), categorised by the industry sectors of the Bank’s counterparties.

Annual Report and Consolidated Financial Statements 50 For the year ended 31 December 2017

OVERVIEW GOVERNANCE FINANCIAL STATEMENTS

123,256,280 123,256,280 34,118,940 201,415 16,496,158 59,617,046 12,822,721 -

17,685,465 17,685,465 Loan commitments and other credit related obligations related credit other and commitments Loan 12,821,361 12,821,361 - 2,398,303 1,669,893 795,908 -

105,570,815 105,570,815 LCs, Guarantees and performance bonds performance and Guarantees LCs, 21,297,579 21,297,579 201,415 14,097,855 57,947,153 12,026,813 -

Credit risk exposures relating to off-balance sheet items are as follows: as are items sheet off-balance to relating exposures risk Credit

451,844,334 451,844,334 97,231,525 2,738,200 58,704,032 72,846,661 23,114,327 197,209,589

3,878,917 3,878,917 3,878,917 3,878,917 - - - - - Other assets Other

99,870,917 99,870,917 ------99,870,917 Government securities – Held-to-maturity – securities Government

250,755,828 250,755,828 93,352,608 93,352,608 2,738,200 58,704,032 72,846,661 23,114,327 - Loans and advances to customers to advances and Loans

90,078,616 90,078,616 ------90,078,616 Deposits and balances due from banking institutions banking from due balances and Deposits

7,260,056 7,260,056 ------7,260,056 Balances with the Central Bank Central the with Balances

At 31 December 2016 December 31 At

99,370,083 99,370,083 35,574,060 - 17,426,048 27,543,047 18,826,928 -

30,118,938 30,118,938 Loan commitments and other credit related obligations related credit other and commitments Loan 19,814,264 19,814,264 - 7,455,864 1,688,223 1,160,587 -

69,251,145 69,251,145 LCs, Guarantees and performance bonds performance and Guarantees LCs, 15,759,796 15,759,796 9,970,184 25,854,824 17,666,341 -

Credit risk exposures relating to off-balance sheet items are as follows: as are items sheet off-balance to relating exposures risk Credit

599,394,344 599,394,344 130,085,094 - 84,458,740 62,329,296 35,836,624 286,684,590

1,929,678 1,929,678

1,929,678 1,929,678 - - - - - Other assets Other

1,680,021 1,680,021 1,680,021 1,680,021 Government securities – Held-for-trading – securities Government

46,654,419 46,654,419 - - - 46,654,419 - - - - Government securities – Held-to-maturity – securities Government

310,780,076 310,780,076 128,155,416 128,155,416 - 84,458,740 62,329,296 35,836,624 - Loans to Retail customers: Retail to Loans

177,248,124 177,248,124 - - 177,248,124 - - - - - Deposits and balances due from banking institutions banking from due balances and Deposits

61,102,026 61,102,026 ------61,102,026 Balances with the Central Bank Central the with Balances

At 31 December 2017 December 31 At Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs Ushs ‘000 Ushs Ushs ‘000 Ushs

sector trade estate ing institutions Others Total Annual Report and Consolidated Financial Statements For the year ended 31 December 2017

Public Public retail and Real - Manufactur Financial

Whole-sale Whole-sale

Consolidated 3.1.5 Concentration of risks of financial assets with credit risk exposure risk credit with assets financial of risks of Concentration 3.1.5 51 Total Ushs ‘000 99,870,917 69,251,145 105,570,815 7,260,056 11,758,122 17,685,465 123,256,280 90,035,159 30,118,938 99,370,083 177,236,485 310,780,076 310,780,076 46,654,419 3,878,919 1,680,021 511,825,127 1,929,679 550,038,802 - Others 3,878,919 1,929,679 - Ushs ‘000 - 15,759,796 21,297,579 12,821,361 34,118,940 19,814,264 35,574,060 - - 128,155,416 128,155,416 132,034,335 130,085,095 - - - ‘000 Ushs Public sector 201,415 201,415 ------trade and retail and retail 9,970,184 7,455,864 2,398,303 Ushs ‘000 - - - 14,097,855 16,496,158 17,426,048 84,458,740 84,458,740 84,458,740 84,458,740 - - - - - Whole-sale - 1,688,223 1,669,893 - - Ushs ‘000 - 25,854,824 57,947,153 59,617,046 27,543,047 62,329,296 62,329,296 62,329,296 62,329,296 - - - - Real estate - - - ing 795,908 1,160,587 Ushs ‘000 - - - 17,666,341 12,026,813 12,822,721 18,826,928 35,836,624 35,836,624 35,836,624 35,836,624 - - - - - Manufactur Financial Ushs ‘000 11,758,122 institutions 177,236,485 7,260,056 90,035,159 99,870,917 46,654,419 1,680,021 197,166,132 237,329,047 ------At 31 December 2017 Credit risk exposures relating to off-balance sheet items are as follows: to off-balance sheet items are relating risk exposures Credit LCs, Guarantees and performance bonds At 31 December 2016 Balances with the Central Bank as follows: to off-balance sheet items are relating risk exposures Credit LCs, Guarantees and performance bonds Balances with the Central Bank Loan commitments and other credit related obligations related Loan commitments and other credit obligations related Loan commitments and other credit Deposits and balances due from banking institutions Deposits and balances due from Deposits and balances due from banking institutions Deposits and balances due from Loans and advances to customers Loans and advances to customers Government securities – Held-to-maturity Government securities – Held-to-maturity Other assets Government securities – Held-for-trading Other assets NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS 3. Financial Risk Management (continued) Risk (continued) 3.1 Credit (continued) risk exposure 3.1.5 Concentration of risks financial assets with credit Separate

Annual Report and Consolidated Financial Statements 52 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Total Total 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 (6,301,411) (3,318,974) 17,812,218 3,892,965 289,341691 289,341,691 16,488,700 12,656,868 318,487,259 232,369,619 254,074,802 247,773,391 (7,317,579) 232,369,619 289,341,691 232,369,619

311,169,680 250,755,828 254,074,802 3,892,965 17,812,218 232,369,619 - Loss - - 84,401 - - 2017 (250,566) 2,707,241 2,707,241 Ushs ‘000 334,968 334,968 298,493 (2,408,748) - ed refer to note 3.1.5 b. to ed refer Ushs ‘000 (7,707,183) 310,780,076 318,487,259 12,656,868 16,488,700 289,341,691 - - - - Ushs ‘000 Corporate 529,238 797,550 797,550 336,796 Doubtful (528,097) (460,754) 1,057,335 Ushs ‘000 1,057,335 225,114,557 136,444,787 225,114,557 136,444,787 - dard - - - - Substan- (74,839) 8,398,337 Ushs ‘000 (2,866,228) 11,264,565 11,264,565 388,173 388,173 313,334 Retail - Ushs ‘000 64,227,134 Watch - - - - 95,924,832 95,924,832 (164,887) (178,122) 64,227,134 Ushs ‘000 16,488,700 16,488,700 16,323,813 17,812,218 17,812,218 17,634,096 - - - Normal - - Ushs ‘000 (3,507,802) (3,178,948) 289,341,691 289,341,691 285,833,889 232,369,619 232,369,619 229,190,671 Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Loans and advances Loans and Loans and advances neither past due nor impaired 53 Less: allowance for impairment (Refer to note 33) Less: allowance for Net Gross Individually impaired Individually impaired Past due but not impaired Past due but not impaired Neither past due nor impaired Past due but not impaired Individually impaired Gross Less: allowance for impairment (Refer to note 33) Net Total Total Neither past due nor impaired impaired Neither past due nor 31 December 2017 Neither past due nor impaired 31 December 2016 Neither past due nor impaired 31 December 2016 31 December 2017 Past due but not impaired Individually impaired Gross Less: allowance for impairment (Refer to note 34) Net Neither past due nor impaired Neither past due nor impaired 3.1.6.2 Loans and advances are summarised as per statutory risk rating as follows as per the FIA as per statutory risk rating as follows summarised advances are 3.1.6.2 Loans and requirements: For the aging analysis of the loans and advances neither past due nor impair a. The quality credit of the portfolio of loans and advances that neither were past due nor (normal impaired to the internal adopted by the Bank. rating system category) can be assessed by reference The impairment allowances shown in the table above are as per Financial Institutions (Credit Classification (Credit Institutions Financial per as are above table the in shown allowances impairment The Regulations 2005. and Provisioning) 3.1.6 per IAS 39: as follows as summarised to customers are and advances 3.1.6.1 Loans NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued) 3.1 Credit Risk (continued) a. Loans and advances past due but not impaired Late processing and other administrative delays on the side of the borrower can lead to a financial asset being past due but not impaired. Therefore, loans and advances less than 90 days past due are not usually considered impaired, unless other information is available to indicate the contrary. Gross amount of loans and advances by class to customers that were past due but not impaired were as follows: Retail Corporate Total Ushs ‘000 Ushs ‘000 Ushs ‘000 31 December 2017 Past due but not impaired 2,136,700 14,352,000 16,488,700 Total 2,136,700 14,352,000 16,488,700 31 December 2016 Past due but not impaired 15,215,067 2,597,151 17,812,218 Total 15,215,067 2,597,151 17,812,218 2017 2016 Ushs ‘000 Ushs ‘000 Less than 30 days 14,170,700 6,046,086 More than 30 days 2,318,000 11,766,132 Total 16,488,700 17,812,218 b. Loans and advances individually impaired i. Loans and advances to customers The individually impaired loans and advances to customers before taking into consideration the cash flows from collateral held were Ushs 12,656,868 (2016: 3,892,965).

The breakdown of the gross amount of individually impaired loans and advances by class are as follows: Retail Corporate Total Ushs ‘000 Ushs ‘000 Ushs ‘000 31 December 2017 Individually impaired 1,964,429 10,692,439 12,656,868 Total 1,964,429 10,692,439 12,656,868 31 December 2016 Individually impaired 3,361,656 531,309 3,892,965 Total 3,361,656 531,309 3,892,965

The following factors are considered to check whether the loans and advances are impaired: ‚‚ Significant financial difficulty of the issuer or obligor; ‚‚ Breach of contract, such as a default or delinquency in interest or principal payments; ‚‚ The lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that would not otherwise be considered; ‚‚ It becoming probable that the borrower will enter bankruptcy or other financial reorganisation ‚‚ The disappearance of an active market for that asset because of financial difficulties (but not simply because the asset is no longer publicly traded; or ‚‚ Observable data indicating that there is a measurable decrease in the estimated future cash flows from a Consolidated of financial assets since initial recognition, although the decrease cannot yet be identified with the individual assets in the Consolidated, including: ‚‚ Adverse changes in the payment status of borrowers in the Consolidated (e.g. an increased number of delayed payments or an increased number of credit card borrowers who have reached their credit limit and are paying the minimum monthly amount); or ‚‚ National or local economic conditions that correlate with defaults on the assets in the Consolidated (e.g. an increase in the unemployment rate in the geographical area of the borrowers, a decrease in property prices for mortgages in the relevant area, a decrease in oil prices for loan assets to oil producers, or adverse changes in industry conditions that affect the borrowers in the Consolidated).

Annual Report and Consolidated Financial Statements 54 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Foreign exchange risk Foreign Stress tests Stress greater greater than the VAR assumes estimate. a certain The ‘holding VAR can be closed period’ (10 days). It also assumes that market model until positions moves occurring over this holding period will follow a similar pattern to those that have occurred over 10- day periods in the past. assessment of past The movements Bank’s is based on data for the past fivethese historical changes in rates, prices, years. indices, etc. The Bank applies directly to its current positions − a method known as historical simulation. Actual outcomes are monitored regularly to test the validity of the assumptions and parameters/factors used in the VAR calculation. The use losses does of outside not this prevent approach of these limits in the event of more significant market movements. As VAR constitutes an integral established part limits are VAR market regime, risk control of the Bank’s by the Board operations and annually allocated to for business units. exposure against Actual all limits, together with trading a Bank-wide VAR, is portfolio reviewed daily by The Bank quality Treasury. back- by monitored continuously is model VAR the of testing the VAR results for trading books. All back- testing exceptions and any exceptional revenues on investigated, are distribution VAR the of side profit the and all to back-testing reported are the results Board of Directors. b. size potential the of indication an provide tests Stress of losses that could arise in extreme conditions. The stress tests carried out by Bank risk factor Treasury include: stress testing, where stress are movements applied to each risk category and ad hoc stress testing, which includes events applying to specific possible positions top 5 borrowers. Bank’s stress or sectors, or to the The results of the stress tests are reviewed by senior management in each business unit and by the Board of Directors. The stress business and typically uses scenario analysis. testing is tailored to the 3.2.2 The Bank exchange currency foreign prevailing takes the in fluctuations on exposure to rates the on its effects financial position currency by of exposure andof level the on limits sets Board cash flows. The and in aggregate for both The table overnightbelow positions, which daily. monitored are and intra-day exchange foreign to exposure Bank’s the summarises risk at 31 December 2017. Included in the table are financial instrumentsthe atBank’s carrying amounts, categorised by currency. Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Market risk measurement techniques Market risk measurement Market risk Market Value at risk Value 55 The Bank applies a ‘value at methodology risk’ (VAR) to its trading and non-trading portfolios to estimate the losses maximum the and held positions of risk market expected, based upon a number of assumptions for various changes in market conditions. sets limits on The the Board value of risk that may be daily a on monitored are which Bank, the for accepted basis by Interest rate Bank risk Treasury. in the non- trading book is measured through the use of interest gap analysis (Note 3.2.3). rate repricing is a statistically based estimate of the potential VAR loss on the current portfolio movements. from It adverse market expresses the the Bank ‘maximum’ might lose, amount but only to confidence a certain (98%). level of There statistical probability (2%) therefore is that actual loss could be a specified a. 3.2.1 The objective of market manage and risk control measurement market risk is acceptable limits exposures while optimising to the within return on risk. development the for responsible is Treasury Bank The of detailed risk management policies and for day-to- day implementation of those policies. 3.2 The Bank takes on exposure to market risks, which is the risk that the fair of value a or financial future instrument cash flows willchanges fluctuate in market because prices. of Market risks open positions arise in from interest rate, currency and equity products, all of which are exposed to specific market general movements and changes in and the level of volatility of market rates or prices such as interest rates, foreign exchange rates and equity prices. The Bank separates exposures to market risk into either portfolios. trading or non-trading non-trading and trading from arising risks market The activities are concentrated in monitored by two Bank teams separately. Regular reports Treasury and are submitted to the Management ALCO and Board ALCO Committees and the Board of Directors and heads of each business unit. portfolios include those positions arising from Trading market-making transactions where the Bank acts as principal with clients or with the market. the interest Non-trading portfolios primarily arise from commercial and retail entity’s the of management rate banking assets and liabilities. Non-trading portfolios also consist of available- foreign and held-to-maturity Bank’s exchange the from arising and equity risks assets. financial for-sale NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued) 3.2 Market Risk (continued)

Consolidated and Separated USD EUR GBP Other Total At 31 December 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with the Central Bank 20,723,278 2,568,727 2,477,233 164,262 25,933,500 Deposits and balances due from banking institutions 107,966,523 1,356,095 2,556,918 63,301 111,942,837 Derivative financial instruments 1,551,136 - - - 1,551,136 Investment securities – Held-to-maturity - - - - - – Held-for-trading - - - - - Investment in subsidiary Loans and advances to customers 177,076,570 8,261 - 180 ,978 177,265,809 Other assets 90,775 61,060 - - 151,835 Total financial assets 307,408,282 3,994,143 5,034,151 408,541 316,845,117 Liabilities Deposits from banks - - - - - Derivative financial instruments 4,769 - - - 4,769 Deposits from customers 255,524,571 3,622,733 4,425,232 1,787 263,574,323 Refinance loans - - - - - Other liabilities 4,956,028 103,050 29,753 17 5,088,848 Total financial liabilities 260,485,368 3,725,783 4,454,985 1,804 268,667,940 Net on-balance sheet financial position 46,922,914 268,360 579,166 406,737 48,177,177 Credit commitments 21,071,014 - - 9,044,924 30,118,938 At 31 December 2016 Assets Cash and balances with the Central Bank 23,553,069 903,067 1,825,038 375,894 26,657,068 Deposits and balances due from banking institutions 75,439,782 1,288,676 2,941,944 354,895 80,025,297 Derivative financial instruments 376,700 - - - 376,700 Investment securities - – Held-to-maturity - - - - - Investment in subsidiary - - - - - Loans and advances to customers 149,257,599 305,167 - - 149,562,766 Other assets 517,422 86,919 4,836 - 609,177 Total financial assets 249,144,572 2,583,829 4,771,818 730,789 257,231,008 Liabilities Deposits from banks 3,613,008 - - - 3,613,008 Derivative financial instruments 40,476 - - - 40,476 Deposits from customers 209,389,584 2,495,165 4,593,380 2,416 216,480,545 Refinance loans - - - - - Other liabilities 10,372,866 7,825 4,720 16 10,385,427 Total financial liabilities 223,415,934 2,502,990 4,598,100 2,432 230,519,456 Net on-balance sheet financial position 25,728,638 80,839 173,718 728,357 26,711,552 Credit commitments 11,337,510 - - - 11,337,510

Annual Report and Consolidated Financial Statements 56 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS GBP GBP GBP GBP Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 57,917 226,883 40,542 158,818 (57,917) (226,883) (40,542) (158,818) EUR EUR EUR EUR Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 (18,785) (5,659) (26,836) (8,084) 18,785 5,659 26,836 8,084 USD USD USD USD Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 3,284,604 37,422 4,692,291 53,461 (3,284,604) (37,422) (4,692,291) (53,461)

Annual Report and Consolidated Financial Statements For the year ended 31 December 2017

Equity Profit before tax before Profit Interest rate risk Interest ii. i. 57 10% (10%) (10%) 10% At 31 December 2016 At 31 December 2017 At 31 December 2016 At 31 December 2017 (10%) 10% (10%) 10% 3.2.2 Below is the impact of a 10% change in foreign exchange rates on the profit before tax and equity: tax and before rates on the profit exchange change in foreign impact of a 10% Below is the Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of because fluctuate will instrument a financial of flows cash future the that risk the is risk rate interest flow Cash will instrument financial a of value the that risk the is risk rate interest value Fair rates. interest market in changes fluctuations of effects the to exposure on takes Bank The rates. interest market in changes of because fluctuate in levels the of prevailing rates market on interest both its fair value and cash flow risks. sets The limits Board monitored is which undertaken, be may that risk at value and repricing rate interest of mismatch of level the on - Total 5,742 1,551,136 1,680,021 5,023,610 3,275,227 - - Ushs ‘000 93,832,065 68,914,550 16,896,456 23,990,548 44,167,973 46,654,419 340 340 4,769 177,248,124 567,854,901 567,855,241 310,780,076 636,769,451 83,949 680,937,424 155,060 554,792,435 12,818,688 - - - - Non 5,742 1,551,136 5,023,610 3,275,227 Ushs ‘000 93,832,065 16,896,456 23,990,548 44,167,973 - - - - - 218,977,406 218,977,746 100,406,811 144,574,784 (118,570,595) 340 340 4,769 Interest bearing Interest 206,153,949 12,818,688 - - - - Over 7,007 7,007 7,007 5 years ------4,078,884 4,071,877 4,078,884 4,078,884 Ushs ‘000

- - - Over 1 year 287,554 203,605 287,554 ------Ushs ‘000 11,015,932 37,562,141 170,951,210 219,241,730 219,529,283 83,949 219,529,283

- - 7 to 12 Months ------9,092,278 1,361,021 8,123,550 Ushs ‘000 52,934,878 55,264,626 63,388,176 63,388,176 55,264,626 55,264,626

- - - 4 to 6 Months ------Ushs ‘000 50,867,437 50,867,437 20,050,948 50,867,437 20,050,948 20,050,948 (30,816,489)

- - 0 to 3 Months 319,000 ------Ushs ‘000 62,764,156 (13,135,523) 166,232,192 242,295,811 242,450,871 242,450,871 229,315,348 229,315,348 155,060

As at 31 December 2017 Assets Cash and balances with the Central Bank Liabilities banks Deposits from Derivative financial instruments Deposits and balances due from banking institutions Deposits and balances due from Deposits from customers Deposits from Derivative financial instruments Refinance loans Government securities Other liabilities – Held-to-maturity Total financial liabilities Total – Held-for-trading non-financial liabilities Total Deferred income tax liability Deferred Loans and advances to customers Other liabilities liabilities Total Interest sensitivity gap Interest Other assets Total financial assets Total Current income tax recoverable Current Property and equipment Property Operating lease prepayments Intangible assets Deferred income tax asset Deferred Total non-financial assets Total Total assets Total NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS 3. Financial Risk Management (continued) 3.2 Market Risk (continued) rate risk (continued) 3.2.2 Interest daily by Bank Treasury. The tables below summarise the non-trading Bank’s book fair value exposure to interest rate risks. It categorised by age. includes the financialBank’s instruments at carrying amounts, Consolidated

Annual Report and Consolidated Financial Statements 58 For the year ended 31 December 2017

OVERVIEW GOVERNANCE FINANCIAL STATEMENTS

Interest sensitivity gap sensitivity Interest (129,028,229) 6,251,676 191,707,964 (2,223,345) 60,985,092 (58,763,397) 68,929,759 68,929,759

Total liabilities Total 14,707,899 14,707,899 173,563,264 446,244,663 446,244,663 203,497,291 - 3,166,820 51,309,389

Total non-financial liabilities non-financial Total 2,150,275 2,150,275 - - - - - 2,150,275 2,150,275

879 879 Deferred income tax liability tax income Deferred 879 879

2,149,396 2,149,396 Other liabilities Other 2,149,396 2,149,396

Total financial liabilities financial Total 201,347,016 201,347,016 - 3,166,820 51,309,389 14,707,899 173,563,264 444,094,388 444,094,388

17,071,791 17,071,791 Other liabilities Other 17,071,791 17,071,791 - - - - -

120,870 120,870 - - - 120,870 - - - Refinance loans Refinance

423,248,243 423,248,243 184,234,749 184,234,749 - 3,045,950 51,309,389 14,707,899 169,950,256 Deposits from customers from Deposits

40,476 40,476 40,476 40,476 Derivative financial instruments financial Derivative - - -

3,613,008 3,613,008 Deposits from banks from Deposits 3,613,008 3,613,008

Liabilities Liabilities

Total assets Total 554,216,673 554,216,673 123,521,175 6,251,676 194,874,781 49,086,045 75,692,992 104,790,004

Total non-financial assets non-financial Total - - - - - 41,192,526 41,192,526 41,192,526 -

------22,791,061 22,791,061 Deferred income tax asset tax income Deferred 22,791,061 22,791,061

3,918,290 3,918,290 ------Intangible assets Intangible 3,918,290 3,918,290

11,541,193 11,541,193

------Property and equipment equipment and Property 11,541,193 11,541,193

196,846 196,846 ------Current income tax recoverable tax income Current 196,846 196,846

2,745,136 2,745,136 - - Other assets Other - - - - - 2,745,136 2,745,136

Total financial assets financial Total 82,328,649 82,328,649 6,251,676 194,874,781 49,086,045 75,692,992 104,790,004 513,024,148 513,024,148

3,660,027 3,660,027

Other assets Other 3,660,027 3,660,027

250,755,828 250,755,828 - - 5,237,438 182,209,171 5,527,227 23,518,177 34,263,815 Loans and advances to customers to advances and Loans

99,870,917 99,870,917 - - 1,014,238 12,665,611 25,292,217 41,221,925 19,676,926 – Held-to-maturity –

------Government securities Government

376,700 376,700 376,700 376,700 - - - - - Derivative financial instruments financial Derivative

80,068,753 80,068,753 Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 18,266,600 18,266,600 10,952,890 50,849,263 - - - - - Deposits and balances due from banking institutions banking from due balances and Deposits

78,291,922 78,291,922 Cash and balances with the Central Bank Central the with balances and Cash 78,291,922 78,291,922 - - - - -

Assets

As at 31 December 2016 December 31 at As Ushs ‘000 Ushs Ushs ‘000 Ushs Ushs ‘000 Ushs Ushs ‘000 Ushs Ushs ‘000 Ushs Ushs ‘000 Ushs

Ushs ‘000 Ushs

Months Months Months 1 year 1 Interest bearing Interest years 5

Total

4 to 6 to 4 3 to 0 7 to 12 to 7 Over Over Non 59 Total - Ushs ‘000 - - 93,832,065 46,654,419 23,990,548 12,736,999 16,895,324 680,873,469 636,632,369 568,194,507 568,194,507 4,769 177,236,485 310,780,076 555,213,730 80,000 83,949 155,060 68,437,862 44,241,099 1,551,136 1,680,021 4,898,168 3,275,227 - Non Ushs ‘000 16,895,324 ------100,281,369 206,575,244 219,317,012 219,317,012 (119,035,643) 144,522,468 4,769 80,000 Interest bearing Interest 1,551,136 4,898,168 3,275,227 93,832,065 23,990,548 12,736,999 44,241,099 -

Over 5 years ------Ushs ‘000 4,078,884 7,007 7,007 7,007 4,071,877 4,078,884 4,078,884 -

Over 1 year ------Ushs ‘000 37,562,141 170,951,210 83,949 208,513,352 208,225,798 208,513,352 203,605 287,554 287,554 -

7 to 12 Months ------Ushs ‘000 55,264,626 26,390,150 81,654,776 9,092,278 1,361,021 18,266,600 52,934,878 55,264,626 55,264,626 81,654,776 -

4 to 6 Months ------Ushs ‘000 - - - 10,952,890 20,050,948 50,867,437 50,867,437 50,867,437 31,003,838 31,003,838 (19,863,599) -

0 to 3 Months ------Ushs ‘000 - - - 148,016,995 242,450,871 242,450,871 (31,350,720) 242,295,811 211,100,151 211,100,151 319,000 155,060 62,764,156 – Held-to-maturity Property and equipment Property Other liabilities Derivative financial instruments customers Deposits from Deposits and balances due from banking institutions Deposits and balances due from Derivative financial instruments – Held-for-trading Other assets Refinance loans Assets Cash and balances with the Central Bank financial assets Total Investment in subsidiary Intangible assets non-financial assets Total assets Total Liabilities banks Deposits from financial liabilities Total Other liabilities non-financial liabilities Total liabilities Total sensitivity gap Interest Government securities Loans and advances to customers income tax asset Deferred As at 31 December 2017 NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS 3. Financial Risk Management (continued) 3.2 Market Risk (continued) rate risk (continued) 3.2.2 Interest Bank

Annual Report and Consolidated Financial Statements 60 For the year ended 31 December 2017

OVERVIEW GOVERNANCE FINANCIAL STATEMENTS

Interest sensitivity gap sensitivity Interest 68,448,445 68,448,445 (129,466,086) 6,251,676 191,707,964 2,223,345) 60,985,092 (58,806,854)

Total liabilities Total 446,545,917 446,545,917 203,798,545 - 3,166,820 51,309,389 14,707,899 173,563,264

Total non-financial liabilities non-financial Total ------2,149,396 2,149,396 2,149,396

2,149,396 2,149,396 Other liabilities Other 2,149,396 2,149,396

Total financial liabilities financial Total 444,396,521 444,396,521 201,649,149 - 3,166,820 51,309,389 14,707,899 173,563,264

16,997,627 16,997,627 16,997,627 16,997,627 - - - - - Other liabilities Other

120,870 120,870 - - - 120,870 - - - Refinance loans Refinance

423,624,540 423,624,540 184,611,046 184,611,046 - 3,045,950 51,309,389 14,707,899 169,950,256 Deposits from customers from Deposits

40,476 40,476 40,476 40,476 - - - - - Derivative financial instruments financial Derivative

3,613,008 3,613,008 Deposits from banks from Deposits ------3,613,008

Liabilities Liabilities

Total assets Total 554,122,020 554,122,020 113,460,116 6,251,676 194,874,782 49,086,044 75,692,992 114,756,410

Total non-financial assets non-financial Total 41,277,054 41,277,054 41,277,054 - - - - -

------22,791,061 22,791,061 Deferred income tax asset tax income Deferred 22,791,061 22,791,061

3,918,290 3,918,290 ------Intangible assets Intangible 3,918,290 3,918,290

------Operating lease prepayments lease Operating - -

11,538,262 11,538,262 ------Property and equipment equipment and Property 11,538,262 11,538,262

204,305 204,305 ------Current income tax recoverable tax income Current 204,305 204,305

2,745,136 2,745,136 ------Other assets Other 2,745,136 2,745,136

80,000 80,000 Investment in subsidiary in Investment 80,000 80,000 - - - - -

Total financial assets financial Total 6,251,676 6,251,676 194,874,782 49,086,044 75,692,992 114,756,410 512,844,966 512,844,966 72,183,062

3,524,303 3,524,303 Other assets Other 3,524,303 3,524,303

250,755,828 250,755,828 34,263,815 34,263,815 Loans and advances to customers to advances and Loans 5,237,438 5,237,438 182,209,171 5,527,227 23,518,177

------– Held-for-trading –

99,870,917 99,870,917 - - 1,014,238 12,665,611 25,292,217 41,221,925 19,676,926 – Held-to-maturity –

------Government securities Government

376,700 376,700 376,700 376,700 - - - - - Derivative financial instruments financial Derivative

90,035,159 90,035,159

18,266,600 18,266,600 10,952,890 60,815,669 - - - - Deposits and balances due from banking institutions banking from due balances and Deposits Annual Report and Consolidated Financial Statements For the year ended 31 December 2017

68,282,059 68,282,059 Cash and balances with the Central Bank Central the with balances and Cash 68,282,059 68,282,059 - - - - -

Assets

As at 31 December 2016 December 31 at As Ushs ‘000 Ushs Ushs ‘000 Ushs Ushs ‘000 Ushs Ushs ‘000 Ushs ‘000 Ushs Ushs ‘000 Ushs

Ushs ‘000 Ushs

Months Months Months 1 year 1 Interest bearing Interest years 5

Total

4 to 6 to 4 3 to 0 7 to 12 to 7 Over Over Non 61 NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued) 3.2 Market Risk (continued)

Below is the impact of a 10% change in interest rates on the profit before tax and equity: Profit before tax Equity Ushs ‘000 Ushs ‘000 At 31 December 2017 (10%) (3,485,473) (2,439,831) 10% 3,485,473 2,439,831 At 31 December 2016 (10%) (3,245,983) (2,272,188) 10% 3,245,983 2,272,188

3.3 Liquidity risk Liquidity risk is the risk that the Bank is unable to ‚‚ Managing the concentration and profile of debt meet its obligations when they fall due as a result maturities. of customer deposits being withdrawn, cash requirements from contractual commitments, or other Monitoring and reporting take the form of cash flow cash outflows, such as debt maturities or margin calls measurement and projections for the next day, week for derivatives. Such outflows would deplete available and month respectively, as these are key periods for cash resources for client lending, trading activities liquidity management. The starting point for those and investments. In extreme circumstances, lack of projections is an analysis of the contractual maturity liquidity could result in reductions in the statement of of the financial liabilities and the expected collection financial position and sales of assets, or potentially date of the financial assets (Notes 3.3.3). an inability to fulfil lending commitments. The risk that the Bank will be unable to do so is inherent Bank Treasury also monitors unmatched medium- in all banking operations and can be affected by a term assets, the level and type of undrawn lending range of institution-specific and market-wide events commitments, the usage of overdraft facilities and the including, but not limited to, credit events, merger impact of contingent liabilities such as standby letters and acquisition activity, systemic shocks and natural of credit and guarantees. disasters.

3.3.1 Liquidity risk management process 3.3.2 Funding approach The Bank’s liquidity management process, as carried Sources of liquidity are regularly reviewed by a out within the Bank and monitored by a separate separate team in Bank Treasury to maintain a wide team in Bank Treasury, includes: diversification by currency, provider, product and ‚‚ Day-to-day funding, managed by monitoring term. future cash flows to ensure that requirements can be met. This includes replenishment of funds 3.3.3 Financial liabilities and assets held for as they mature or are borrowed by customers. managing liquidity risk The Bank maintains an active presence in global The table below presents the cash flows payable money markets to enable this to happen; by the Bank under financial liabilities and assets held for managing liquidity risk by remaining ‚‚ Maintaining a portfolio of highly marketable contractual maturities at the reporting date. The assets that can easily be liquidated as protection amounts disclosed in the table are the contractual against any unforeseen interruption to cash undiscounted cash flows, whereas the Bank flow; manages the liquidity risk based on a different ‚‚ Monitoring the liquidity ratios of the statement of financial position against internal and regulatory basis (see Note 3.3.1 for details), not resulting in a requirements; and significantly different analysis.

Annual Report and Consolidated Financial Statements 62 For the year ended 31 December 2017

OVERVIEW GOVERNANCE FINANCIAL STATEMENTS

Net Liquidity gap Liquidity Net (30,455,531) 4,071,876 205,521,979 (463,570) (65,691,730) (173,894,086)

Total off-balance sheet items sheet off-balance Total 99,370,080 99,370,080 - 2,703,817 19,603,054 34,875,241 42,187,968

40,118,121 40,118,121 Letters of credit of Letters - - - 7,977,719 7,241,764 24,898,638

2,331,475 2,331,475 Performance bonds Performance - - - 391,539 493,722 1,446,214

26,801,546 26,801,546 Guarantees - - 2,703,817 11,233,796 4,645,352 8,218,581

- - 30,118,938 30,118,938 Loan commitments Loan - - - 22,494,403 7,624,535

Off-balance sheet items sheet Off-balance

On-balance sheet liquidity gap liquidity sheet On-balance 68,914,549 68,914,549 4,071,876 208,225,796 19,139,484 (30,816,489) (131,706,118)

Total financial liabilities financial Total 567,854,901 567,854,901 7,007 287,555 55,264,625 50,867,437 461,428,277

- - - - - 12,818,688 Other liabilities Other 12,818,688

83,949 83,949 Refinance loans Refinance - - 83,949 - - -

554,792,435 554,792,435 Deposits from customers from Deposits 7,007 7,007 203,605 55,264,626 50,867,437 448,449,760

4,769 4,769 Derivative financial instruments financial Derivative - - - - - 4,769

155,060 155,060 Deposits from banks from Deposits - - - - - 155,060

Liabilities Liabilities

Total financial assets financial Total 636,769,450 636,769,450 4,078,883 208,513,351 74,404,109 20,050,948 329,722,159

5,023,610 5,023,610 Other assets Other - - - - - 5,023,610

310,780,076 310,780,076 Loans and advances to customers to advances and Loans 62,764,156 62,764,156 170,951,210 170,951,210 52,934,878 20,050,948 4,078,884 4,078,884

1,680,021 1,680,021 – Held-for-trading – 319,000 319,000 1,361,021 1,361,021 - - - -

46,654,418 46,654,418 – Held-to-maturity – - - 37,562,141 37,562,141 9,092,278 - - -

Governments Securities Governments

1,551,136 1,551,136 Derivative financial assets financial Derivative 1,551,136 1,551,136 - - - - -

177,248,124 177,248,124 Deposits and balances due from banking institutions banking from due balances and Deposits 166,232,192 166,232,192 11,015,932 11,015,932 - - - -

93,832,065 93,832,065 Cash and balances with the Central Bank Central the with balances and Cash 93,832,065 93,832,065 - - - - -

Annual Report and Consolidated Financial Statements For the year ended 31 December 2017

Assets

Ushs ‘000 Ushs As at 31 December 2017 December 31 at As Ushs ‘000 Ushs Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs

Total months 5 years 5 year 1 months months

0 to 3 to 0 Over Over 12 to 7 6 to 4

Consolidated 63 Total - - Ushs ‘000 40,476 126,914 376,700 99,904,362 3,613,008 17,071,791 17,685,465 49,929,030 2,783,527 52,522,033 293,868,617 423,950,334 78,291,922 80,068,753 3,660,027 556,170,381 444,802,523 111,367,858 122,920,055 (11,552,197) Over - - 5 years ------7,660,797 7,660,797 Ushs ‘000 1,166,373 7,660,797 6,494,423 Over 1 year ------Ushs ‘000 12,546,921 13,879,924 126,914 218,857,017 236,611,896 3,874,955 13,879,924 3,748,041 232,736,941 224,064,975 7 to 12 months ------Ushs ‘000 5,527,227 1,556,401 4,138,903 30,819,445 51,309,389 43,423,470 (20,489,944) (63,913,414) 25,292,217 51,309,389 12,325,684 25,402,483 4 to 6 months ------,631,269 Ushs ‘000 1,864,045 3,284,731 75,897,583 52,222,059 14,707,899 11,157,481 41,221,925 14,707,899 187,580 8,967,625 61,189,684 23,518,177 0 to 3 months - - Ushs ‘000 40,476 376,700 45,098,400 56,649,036 216,371,589 374,910,280 78,291,922 80,068,753 19,710,371 34,263,815 3,660,027 3,613,008 17,071,791 3,495,736 7,015,354 1,039,547 (158,538,691) (215,187,727) 354,185,005 Investment securities Assets Cash and balances with the Central Bank banking institutions Deposits and balances due from Derivative financial instruments financial assets Total Deposits from banks Deposits from On-balance sheet liquidity gap Loan commitments Net Liquidity gap – Held-to-maturity Loans and advances to customers – Held-for-trading Other assets Liabilities Derivative financial instruments Refinance loans Other liabilities financial liabilities Total Deposits from customers Deposits from Off-balance sheet items Guarantees Performance bonds Letters of credit off-balance sheet items Total As at 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS 3. Financial Risk Management (continued) 3.3 Liquidity Risk (continued) 3.3.3 Financial liabilities and assets held for managing liquidity risk (continued) Consolidated

Annual Report and Consolidated Financial Statements 64 For the year ended 31 December 2017

OVERVIEW GOVERNANCE FINANCIAL STATEMENTS

(30,932,217) 4,071,877 205,521,980 (463,571) (65,691,731) (174,207,921) Net Liquidity gap Liquidity Net

99,370,080 99,370,080 - 2,703,817 19,603,055 34,875,242 42,187,969 Total off-balance sheet items sheet off-balance Total

40,118,121 40,118,121 - - - 7,977,719 7,241,765 24,898,638 Letters of credit of Letters

2,331,475 2,331,475 - - - 391,539 493,723 1,446,214 Performance bonds Performance

26,801,546 26,801,546 - - 2,703,817 11,233,797 4,645,352 Guarantees 8,218,581 8,218,581

30,118,938 30,118,938 - - - - 22,494,403 7,624,536 Loan commitments Loan

Off-balance sheet items sheet Off-balance

68,437,863 68,437,863 4,071,877 208,225,797 19,139,484 (30,816,489) (132,019,952) On-balance sheet liquidity gap liquidity sheet On-balance

568,194,507 568,194,507 7,007 287,554 55,264,625 50,867,437 461,605,030 Total financial liabilities financial Total

12,736,999 12,736,999 Other liabilities Other - - - - - 12,736,999

83,949 83,949 - - 83,949 - - - Refinance loans Refinance

555,213,730 555,213,730 7,007 7,007 203,605 55,264,626 50,867,437 448,028,465 Deposits from customers from Deposits

4,769 4,769 - - - - - 4,769 Derivative financial instruments financial Derivative

155,060 155,060 - - - - - 155,060 Deposits from banks from Deposits

Liabilities Liabilities

636,632,370 636,632,370 4,078,884 208,513,351 74,404,109 20,050,948 329,585,078 Total financial assets financial Total

4,898,168 4,898,168 - - Other assets Other 4,898,168 4,898,168 - - - -

310,780,076 310,780,076 20,050,948 20,050,948 62,764,156 170,951,210 170,951,210 52,934,878 4,078,884 4,078,884 Loans and advances to customers to advances and Loans

1,680,021 1,680,021 319,000 319,000 1,361,021 1,361,021 - - - - - – Held-for-trading –

46,654,419 46,654,419 37,562,141 37,562,141 9,092,278 - - - - – Held-to-maturity –

1,551,136 1,551,136 1,551,136 1,551,136 ------Derivative financial assets financial Derivative

177,236,485 177,236,485 166,220,553 166,220,553 11,015,932 11,015,932 - - - - - Deposits and balances due from banking institutions banking from due balances and Deposits

93,832,065 93,832,065 93,832,065 93,832,065 ------Cash and balances with the Central Bank Central the with balances and Cash

Annual Report and Consolidated Financial Statements For the year ended 31 December 2017

Assets

Ushs ‘000 Ushs As at 31 December 2017 December 31 at As Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs

Total 5 years 5 year 1 months months months

Over Over 12 to 7 6 to 4 3 to 0 Bank 65 Total - - 40,476 Ushs ‘000 126,913 376,700 2,783,527 3,524,303 3,613,008 17,685,465 49,929,030 52,522,033 68,282,059 99,904,362 90,035,159 423,950,334 16,997,626 (11,657,212) 293,868,617 444,728,357 555,991,200 122,920,055 111,262,843 ------Over 5 years Ushs ‘000 6,494,423 7,660,796 1,166,373 7,660,796 7,660,796 - Over ------1 year Ushs ‘000 126,914 3,748,041 3,874,954 224,064,975 236,611,895 12,546,921 13,879,924 13,879,924 232,736,941 218,857,017 ------7 to 12 months Ushs ‘000 5,527,227 1,556,401 4,138,903 25,402,483 30,819,444 25,292,217 51,309,389 51,309,389 12,325,684 43,423,470 (63,913,416) (20,489,945) ------4 to 6 months Ushs ‘000 187,580 3,631,269 8,967,625 3,284,731 1,864,045 52,222,058 23,518,177 75,897,582 11,157,481 41,221,925 14,707,899 14,707,899 61,189,683 - - - 0 to 3 months 40,476 376,700 Ushs ‘000 7,015,354 3,524,303 1,039,547 34,263,815 3,613,008 3,495,736 56,649,036 16,997,627 205,001,481 45,098,400 68,282,059 78,877,678 19,676,926 354,185,005 374,836,115 (226,483,670) (169,834,634) Liabilities Off-balance sheet items Refinance loans Assets Cash and balances with the Central Bank banking institutions Deposits and balances due from Derivative financial instruments Investment securities – Held-to-maturity – Held-for-trading Loans and advances to customers Other assets financial assets Total banks Deposits from Derivative financial instruments customers Deposits from Other liabilities financial liabilities Total On-balance sheet liquidity gap Loan commitments Guarantees Performance bonds Letters of credit off-balance sheet items Total Net Liquidity gap As at 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS 3. Financial Risk Management (continued) 3.3 Liquidity Risk (continued) 3.3.3 Financial liabilities and assets held for managing liquidity risk (continued) Bank

Annual Report and Consolidated Financial Statements 66 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS 340 Total 5,742 Ushs ‘000 4,769 16,896,456 23,990,547 46,654,419 93,832,065 83,949 12,819,906 155,060 3,275,227 1,680,021 310,780,076 5,023,610 680,937,424 1,551,136 554,792,435 567,855,241 177,248,124 - date 294,901 ------Ushs ‘000 16,896,456 23,990,547 37,562,141 340 256,754,466 175,030,094 83,949 months after the reporting the reporting More than 12 More 210,612 3,275,227 - - date 5,742 Ushs ‘000 - - - 424,182,958 177,248,124 567,560,340 4,769 months after Less than 12 the reporting the reporting 155,060 554,581,823 5,023,610 1,680,021 1,551,136 9,092,278 135,749,982 135,749,982 93,832,065 93,832,065 12,819,906 5,742 position 3,275,227 5,023,610 1,680,021 1,551,136 Ushs ‘000 Statement 16,896,456 23,990,547 46,654,419 93,832,065 12,819,906 340 of financial 680,937,424 310,780,076 177,248,124 4,769 554,792,435 567,855,241 83,949 155,060 Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Current and Non-Current Assets and Liabilities Assets and Non-Current and Current Assets held for managing liquidity risk for managing liquidity Assets held Cash and balances with the central bank; Cash and balances Certificates of deposit; Government bonds and other securities that are readily acceptable in repurchase agreements with the central bank; and trading portfolios. liquid instruments in the Bank’s of liquidity in the form of highly Secondary sources 67 ‚ ‚ ‚ ‚ Intangible assets income tax asset Deferred Assets Total Loans and advances to customers Other assets income tax recoverable Current and equipment Property Government securities – Held-for-trading Derivative financial instruments Government securities – Held-to- maturity Deposits and balances due from Deposits and balances due from banking institutions Liabilities Deposits due to other banks Cash and balances with Central Bank Derivative financial instruments Other liabilities income tax liability Deferred Customer deposits Refinance loans Liabilities Total As at 31 December 2017 Assets ‚ ‚ ‚ ‚ 3.3.5 The table below shows the current and non-current assets and liabilities as at 31 December 2016 and 2017 respectively. Consolidated The Bank holds a diversified portfolio of cash market environment. in a stressed and contingent funding obligations and high-quality highly-liquid securities to support payment liquidity risk comprise: held for managing assets The Bank’s 3.3.4 NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued) 3.3 Liquidity Risk (continued) 3.3.5 Current and Non-Current Assets and Liabilities (continued)

Less than 12 More than 12 Statement months after months after of financial the reporting the reporting position date date Total As at 31 December 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets

Cash and balances with Central Bank 68,282,059 68,282,059 - 68,282,059 Deposits and balances due from banking 90,035,159 90,035,159 - institutions 90,035,159 Derivative financial instruments 376,700 376,700 - 376,700 Government securities – Held-to-maturity 99,870,917 86,191,069 13,679,848 99,870,917 Loans and advances to customers 250,755,828 20,196,430 230,559,398 250,755,828 Other assets 6,269,439 6,269,439 - 6,269,439 Investment in subsidiary 80,000 - 80,000 80,000 Current income tax recoverable 204,305 204,305 - 204,305 Property and equipment 11,538,262 - 11,538,262 11,538,262 Intangible assets 3,918,290 - 3,918,290 3,918,290 Deferred income tax asset 22,791,061 - 22,791,061 22,791,061 Total Assets 554,122,020 271,555,161 282,566,859 554,122,020 Liabilities Deposits due to other banks 3,613,008 3,613,008 - 3,613,008 Derivative financial instruments 40,476 40,476 - 40,476 Customer deposits 423,624,540 420,578,590 3,045,950 423,624,540 Refinance loans 120,870 - 120,870 120,870 Other liabilities 19,147,023 19,147,023 - 19,147,023 Total Liabilities 446,545,917 443,379,097 3,166,820 446,545,917

3.4 Fair value of financial instruments

i. Loans and advances to customers iii. Refinance loans Loans and advances are net of charges The refinance loans are measured at for impairment. The estimated fair value cost. of loans and advances represents the iv. Other liabilities discounted amount of estimated future The fair value of the other liabilities cash flows expected to be received. is computed through computing the Expected cash flows are discounted at present value of the cash flows using the current market rates to determine fair weighted average cost of capital of the value. bank.

ii. Government securities held-to-maturity a) Fair value hierarchy The fair value for these held-to-maturity IFRS 13 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation assets is based on market prices. Where techniques are observable or unobservable. this information is not available, fair value Observable inputs reflect market data obtained from is estimated using quoted market prices for independent sources; unobservable inputs reflect the securities with similar credit, maturity and Bank’s market assumptions. yield characteristics.

Annual Report and Consolidated Financial Statements 68 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Total 83,949 80,000 145,951 169,990 2,141,975 1,551,136 4,898,168 Ushs ‘000 62,489,718 12,736,999 573,624,855 390,009,588 586,761,743 732,239,134 93,832,065 177,236,485 Level 3 Ushs ‘000 573,624,855 93,832,065 80,000 1,551,136 390,009,588 4,898,168 145,951 169,990 83,949 62,489,718 177,236,485 - 12,736,999 586,761,743 730,097,160 ------level 2 - - 2,141,975 2,141,975 Ushs ‘000 - - investments and debt instruments with significant significant with instruments debt and investments components. unobservable This hierarchy requires the use of observable market data when available. The Bank and observable market considers prices in its valuations where relevant possible. The fair value of the financial assets and liabilities in liabilities and assets financial the of value fair The the table below is included at the amount at which the instrument could be exchanged in a transaction between willing parties, other than in current a or liquidation sale. forced Level 1 - - Ushs ‘000 ------Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Level 3 – inputs for are the asset not or liability based that (unobservable inputs). This level on includes equity observable market data Level 2 – included within Inputs Level 1 other that are observable for than the asset quoted or liability, prices either directly prices). (that is, derived from prices) or indirectly (that is, as Level 1 – Quoted prices (unadjusted) in markets active for identical assets or level includes liabilities. listed This equity securities and Uganda example, (for exchanges on instruments debt Stock Exchange). 69 Liabilities measured at fair value Liabilities measured Assets measured at fair value Assets measured Deposits due to other banks Derivative financial instruments Refinance loans Other liabilities Loans and advances to customers Other assets Customer deposits Derivative financial assets Government securities – Held-to-maturity Government securities – Held-for-trading Investment in subsidiary As at 31 December 2017 Cash and balances with Central Bank banking Deposits and balances due from institutions ‚ ‚ ‚

‚ ‚ ‚ These two types of inputs have created the following fair value hierarchy: NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued) 3.4 Fair value of financial instruments (continued)

Level 1 level 2 Level 3 Total As at 31 December 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets measured at fair value Cash and balances with Central Bank - - 78,291,922 78,291,922 Deposits and balances due from banking - 80,025,296 institutions - 80,025,296 Derivative financial assets - - 376,700 376,700 Government securities – Held-to-maturity - - 99,870,917 99,870,917 Government securities – Held-for-trading - - - - Investment in subsidiary - - 80,000 80,000 Loans and advances to customers - - 250,755,828 250,755,828 Other assets - - 6,269,441 6,269,441 Current income tax recoverable - - 204,305 204,305 - - 515,874,409 515,874,409 Liabilities measured at fair value Customer deposits - - 555,213,730 555,213,730 Deposits due to other banks - - 155,060 155,060 Derivative financial instruments - - 4,769 4,769 Refinance loans - - 83,949 83,949 Other liabilities - - 12,736,999 12,736,999 - - 568,194,507 568,194,507

3.5 Capital management The Bank’s objectives when managing capital, which The regulatory capital requirements are strictly is a broader concept than the ‘equity’ on the face of observed when managing economic capital. The the statement of financial position, are: Bank’s regulatory capital is managed by its Bank Treasury and comprises two tiers: ‚‚ To comply with the capital requirements set by the Financial Institutions Act 2004; ‚‚ Tier 1 capital: share capital, general banking ‚‚ To safeguard the Bank’s ability to continue as a reserve, retained earnings and reserves created going concern so that it can continue to provide by appropriations of retained earnings, less any returns for shareholders and benefits for other deductions determined by the central bank; stakeholders; and and; ‚‚ To maintain a strong capital base to support the development of its business. ‚‚ Tier 2 capital: Revaluation reserve general provisions for bad debts Capital adequacy and the use of regulatory capital The risk weighted assets are measured by are monitored daily by the Bank’s management, means risk weights. Risk weights are assigned employing techniques based on the guidelines to assets and off balance sheet items according developed by the Basel Committee, as implemented to the Financial Institutions Regulations 2005. by the Bank of Uganda (the Authority), for supervisory purposes. The required information is filed with the Authority on a quarterly basis. The table below summarises the composition The Bank maintains a ratio of core capital to its risk of regulatory capital and the ratios of the Bank for the years ended 31 December 2017 weighted assets and total regulatory capital to its risk- and 2016. During those two years, the Bank weighted assets above the minimum levels of 8% and complied with all of the externally imposed 12% respectively as established under the FIA 2004 capital requirements to which it is subject. regulations.

Annual Report and Consolidated Financial Statements 70 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS 2016 20.26% 22.03% (80,000) Ushs ‘000 (3,918,290) (336,224) 74,351,929 (22,791,061) 4,727,505 3,116,160 3,357,070 6,473,230 80,825,158 366,899,563 70,667,933 96,750,000 296,231,630 2017 18.27% 19.65% (80,000) Ushs ‘000 2,434,811 3,672,689 6,107,500 (1,546,367) (3,275,227) (23,990,548) 445,190,513 13,494,151 81,352,009 51,050,377 96,750,000 87,459,509 394,140,136 Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 71 Core capital ratio Core capital ratio Total Less: Unrealized foreign exchange gains foreign Less: Unrealized subsidiary Less: Investment in risk-weighted assets Total Retained earnings Less: Intangible assets income tax asset Less: Deferred Tier 1 capital qualifying Total Off-balance sheet Risk-weighted assets: On-balance sheet Revaluation reserve General provisions qualifying Tier 2 capital Total capital regulatory Total Tier 2 capital Tier 1 capital capital Share 8% and 12% respectively. and total capital ratios are core The minimum required NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued) 3.4 Fair value of financial instruments (continued)

Nominal statement of Risk weighted financial position amounts amounts 2017 2016 2017 2016 Risk Shs ‘000 Shs ‘000 Weight Shs ‘000 Shs ‘000 Balance sheet assets (net of provisions) Cash and balances with Central Bank 93,832,065 78,291,922 0% - - Deposits and balances due from banking 130,392,122 56,611,983 20% 26,078,424 13,324,369 institutions Due from banks outside Uganda with long-term ratings as follows; Rated AAA to AA(-) 169,316 169,572 20% 33,863 33,914 Rated A (+) to A (-) 30,204,159 17,622,863 50% 15,102,080 8,811,432 Rated A (-) to non-rated 16,470,888 5,620,878 100% 16,470,888 5,620,878 Government securities – Held-to-maturity 46,654,419 99,870,917 0% - - Government securities – Held-for-trading 1,680,021 - 0% - - Loans and advances to customers 314,661,390 250,633,336 100% 314,661,390 250,633,336 Investment in subsidiary 80,000 80,000 0% - - Property and equipment 16,895,324 11,538,262 100% 16,895,324 11,538,262 Other assets 4,898,168 6,269,439 100% 4,898,168 6,269,439 Current income tax recoverable 204,305 0% - - Total assets 655,937,872 526,913,477 394,140,137 296,231,630 Off-balance sheet positions Performance bonds 2,331,475 2,783,527 50% 1,165,738 1,391,764 Guarantees 26,801,546 49,929,030 100% 26,801,546 49,929,030 Letters of credit 40,118,121 52,522,033 20% 8,023,624 10,504,407 Foreign currency contracts 1,546,367 336,224 0% - - Unutilised commitments 30,118,938 17,685,465 50% 15,059,469 8,842,733 100,916,447 123,256,279 51,050,376 70,667,932 Total risk-weighted assets 756,854,319 650,169,756 445,190,513 366,899,562

The breakdown of the Loans and advances to customers is as below; 2017 2016 Shs ‘000 Shs ‘000 Gross loans and advances (note 21) 318,487,259 254,074,802 Less Interest Suspended (180,979) (497,126) Less Specific Provisions (note 33) (3,644,890) (2,944,341) Net loans and advances 314,661,390 250,633,336

Annual Report and Consolidated Financial Statements 72 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Held-to-maturity investments plant and equipment Property, Where market observable inputs are not available, they they available, not are inputs observable market Where are estimated based on appropriate Where assumptions. valuation techniques (for example, are used to models) determine fair values, they are validated and periodically reviewed them. that sourced independent of those by qualified personnel All models are certified before theymodels are calibrated are used,to ensure and that outputs reflect actual data and comparative market prices. To the extent practical, models use only observable however, areas data; such as credit risk (both own credit correlations and volatilities risk), counterparty and risk require management to make estimates. note 3.4. Refer to c. In accordance with classifies IAS some 39 non-derivative financial guidance, assets with fixed the or Bank determinable payments and as fixed maturity held-to-maturity. significant judgement. In making This this judgement, the classificationBank evaluates its intention and requires ability to hold such investments to maturity. If the Bank were to keep these investments to fail maturity other than under to specific circumstances – forinsignificant amount close to example, maturity – the selling Bank is to an the reclassify category required entire as available- for-sale. Accordingly, the fair value instead of amortised cost. at measured investments would be d. The bank carries its buildings at revalued amounts, being its fair value at and less any subsequent accumulated depreciation the date of the subsequent accumulated impairment losses. revaluation Changes in fair income. comprehensive value are recognised in other Revaluations shall be made with sufficient regularity sufficient with made be shall Revaluations to ensure that the carrying amount does not differ materially from that which would be using fair determined value at the end of the reporting period. The Bank determined that as 2017. at 31 December Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Impairment losses on loans and advances Fair value of financial instruments AND JUDGEMENTS 73 The Bank makes estimates and affect assumptions the reported that amounts assets of and liabilities within the next assumptions financial required year. in All conformity with best estimates IFRS estimates undertaken and are in accordance with applicable the standard. Estimates and judgements are evaluated on a continuous on basis, and past are experience based events. to future expectations with regard and other factors, including Accounting policies and directors’ judgements certain for items are especially due to their materiality. and financial position results critical to the Bank’s a. The Bank determining In basis. quarterly a on reviews least at impairment its loan portfolios whether an to impairment assess loss in profit or should loss, the be Bank makes judgements recorded whether as to there is any observable data indicating impairment an trigger followed by measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with that portfolio. indicating data observable include may evidence This payment the in change adverse an been has there that status of borrowers in a Consolidated, or national or with defaults local economic conditions that correlate on assets in the Consolidated. estimates The based directors on use historical assets loss with credit experience risk characteristics for portfolio the and in those to objective similar impairment of evidence cash flows. when scheduling future used for methodology and assumptions The cash estimating both the amount and timing of future differences any reduce to regularly reviewed are flows between loss estimates and actual loss experience. Refer to note 21. b. The fair value of active market exists or financial where quoted prices are not instrumentsvaluation whereusing by determined are available otherwise no techniques. In these estimated from observable cases, data in respect of similar the fair financial instruments or using models. values are 4. CRITICAL ACCOUNTING ESTIMATES ESTIMATES ACCOUNTING CRITICAL 4. 5. INTEREST INCOME AND INTEREST EXPENSES 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Interest income Loans and advances 41,561,892 32,710,396 41,561,892 32,710,396 Deposits and balances due from banking 5,627,374 2,840,857 5,627,374 2,840,857 institutions 47,189,266 35,551,253 47,189,266 35,551,253 Government securities-Held to maturity 9,260,775 14,759,829 9,260,775 14,759,829 Government securities-Held for trading 12,910 - 12,910 - 56,462,951 50,311,082 56,462,951 50,311,082 Interest expense Deposits from banks 368,445 720,716 368,445 720,716 Deposits from customers 21,235,030 17,119,791 21,235,030 17,119,791 BOU refinance schemes 4,745 10,747 4,745 10,747 21,608,220 17,851,254 21,608,220 17,851,254

The effective interest rate for loans and advance is 13.1% (2016:12.8%). The effective interest rate for deposits is 3.8% (2016: 4.0%). The effective interest rate for government securities is 18.5% (2016: 14.8%).

6. NET FEE AND COMMISSION INCOME 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate

Fee and commission income Credit related fees and commissions 4,341,761 2,362,019 4,341,761 2,362,019 Commission income 12,267,177 13,672,795 12,267,177 13,672,795 Commission on trade 116,551 459,687 - - Other operating income 3,373,791 3,600,959 3,302,506 3,559,182 20,099,280 20,095,460 19,911,444 19,593,996

7. NET FOREIGN EXCHANGE GAINS 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Unrealised exchange gain 1,546,367 336,224 1,546,367 336,224 Realised exchange gains 2,216,481 3,685,424 2,216,481 3,685,424 3,762,848 4,021,648 3,762,848 4,021,648

Annual Report and Consolidated Financial Statements 74 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS 2016 2016 2016 2016 717,173 838,143 302,967 Separate Separate Separate Separate 1,346,066 1,365,327 5,649,500 2,177,009 2,505,071 2,661,458 5,166,529 2,830,954 2,830,954 2,527,987 2,830,954 1,477,178 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 78,808 11,454,853 12,160,205 15,577,028 1,222,472 2017 2017 2017 2017

731,403 Separate Separate Separate Separate 1,452,861 1,225,431 1,266,350 2,591,840 6,253,779 6,253,779 5,195,545 1,058,234 6,253,779 1,299,181 2,362,614 Ushs ‘000 Ushs ‘000 Ushs ‘000 2,893,223 2,048,661 4,941,884 Ushs ‘000 12,299,578 38,765 13,305,196 17,698,394 5,724,331 2016 2016 2016 2016 78,808 717,173 Ushs ‘000 2,507,727 2,661,458 5,169,185 840,433 Ushs ‘000 Ushs ‘000 Ushs ‘000 302,967 1,232,174 1,493,319 1,346,066 1,367,727 11,459,543 5,649,500 2,177,009 2,830,954 2,830,954 2,527,987 2,830,954 15,699,891 12,257,225 Consolidated Consolidated Consolidated Consolidated 2017 2017 2017 2017

38,765 731,403 2,895,019 2,048,661 4,943,680 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 1,308,883 2,367,756 1,452,861 1,227,981 1,268,750 5,724,331 2,591,840 17,810,258 13,402,216 12,304,528 5,195,545 1,058,234 6,253,779 6,253,779 6,253,779 Consolidated Consolidated Consolidated Consolidated Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 AND AMORTISATION DEPRECIATION GENERAL AND ADMINISTRATIVE EXPENSES GENERAL AND ADMINISTRATIVE BENEFITS EXPENSES EMPLOYEE LOAN IMPAIRMENT CHARGES LOAN IMPAIRMENT

75 Other administrative expenses Marketing and public relations and entertainment Travel and postage Telecommunication Occupancy, furniture and equipment furniture Occupancy, IT and software costs IT and software Depreciation of property and equipment of property Depreciation (Note 24) Amortisation of intangible assets (Note 25) - identified - unidentified Loans and advances to customers (Note 21) Loans and advances in impairment Net Increase Other staff costs Defined contribution fund Salaries National Social Security Fund contributions 11. 10. 9. 8. 12. OTHER OPERATING EXPENSES 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Audit and other professional fees 130,000 155,900 130,000 155,900 Reversal of charges* 1,755,728 1 ,036,776 1,755,728 1,036,776 Other general expenses 8,544,112 12,287,123 8,484,812 12,227,371 Depreciation and amortisation (note 11) 4,943,680 5,169,185 4,941,884 5,166,529 15,373,520 17,612,208 15,312,424 18,586,576 *Reversal of charges relates to concessions given to customers and reversal of charges on overdrawn accounts.

13. INCOME TAX 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Current income tax Current income tax 3,151 244,429 - 150,309 Income tax on government securities 2,823,606 2,756,366 2,823,606 2,756,366 Prior year overstated income tax receivable 204,305 - 204,305 - Deferred tax Current year (908,017) (1,930,883) (907,478) (1,931,762) Prior year under provision - 832,141 - 832,141 Prior year under-provision 33,564 - 33,564 - Income tax expense 2,156,609 1,902,053 2,153,997 1,807,054

The tax on the consolidated profit before income tax differs from the theoretical amount as follows: 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Profit before income tax 6,974,774 7,937,564 6,964,848 7,626,061 Tax calculated at the tax rate of 30% (2016: 30%) 2,092,432 2,381,269 2,089,454 2,287,818 Effect of: - Final tax on government securities 2,823,606 2,756,366 2,823,606 2,756,366 - Prior year tax under provision 204,305 832,141 204,305 832,141 - Permanent difference (247,901) (247,901) - - Income not subject to tax (2,782,106) (4,220,251) (2,782,106) (4,219,582) (Tbills + Tbonds) - Prior year under provision of deferred tax in - 1,548 - - subsidiary Prior year under-provision 33,564 - 33,564 - - Expenses not deductible for tax purposes 32,708 150,980 33,073 150,311 Income tax expense 2,156,609 1,902,053 2,153,997 1,807,054 The effective tax rate for 2017 is 31% (2016: 24%).

Annual Report and Consolidated Financial Statements 76 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS

- - Total 4,769 40,476 83,949 120,870 376,700 155,060 Ushs ‘000 4,218,270 3,613,008 1,551,136 1,680,021 3,660,027 17,071,791 12,818,688 78,291,922 80,068,753 99,870,917 93,832,065 46,654,419 567,854,901 513,582,390 444,094,388 636,769,451 554,792,435 250,755,828 423,248,243 177,248,124 310,780,076 ------cost 83,949 120,870 155,060 Financial 3,613,008 Ushs ‘000 amortised 17,071,791 12,818,688 liabilities at 423,248,243 554,792,435 567,850,132 444,053,912 ------loss 4,769 4,769 40,476 40,476 Held at through through profit or profit 376,700 376,700 fair value 1,551,136 1,680,021 Ushs ‘000 3,231,157 ------Held to maturity Ushs ‘000 46,654,419 99,870,917 99,870,917 46,654,419 ------cost Ushs ‘000 4,218,270 5,023,610 Amortised 78,291,922 80,068,753 93,832,065 250,755,828 310,780,076 177,248,124 413,334,773 586,883,875 Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 INSTRUMENTSFINANCIAL BY CATEGORY

77 Other liabilities Financial liabilities at amortised cost banks Deposits from customers Deposits from Derivative financial instruments Refinance loans Government securities – Held-for-trading Loans and advances to customers Other assets Cash and bank balances with the Central the with balances bank and Cash Bank banking Deposits and balances due from institutions Derivative financial instruments Government securities – Held-to-maturity Current income tax payable income Current Other liabilities At 31 December 2016 Financial assets Financial liabilities at amortised cost banks Deposits from customers Deposits from Derivative financial instruments Refinance loans Derivative financial instruments Government securities; Held-to-maturity Government securities; Held-for-trading Loans and advances to customers Other assets Financial assets Central the with balances bank and Cash Bank banking due from Deposits and balances institutions At 31 December 2017 At 31 December

Consolidated 14. NOTES TO THE FINANCIAL STATEMENTS (continued) 14. Financial Instruments by Category (continued)

Bank Held at fair value Financial through liabilities at Amortised Held to profit or amortised cost maturity loss cost Total At 31 December 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Financial assets Cash and bank balances with the Central Bank 93,832,065 - - 93,832,065 Deposits and balances due from banking institutions 177,236,485 - - 177,236,485 Derivative financial instruments - - 1,551,136 - 1,551,136 Government securities; Held-to-maturity - 46,654,419 - - 46,654,419 Government securities; Held-for-trading - - 1,680,021 - 1,680,021 Loans and advances to customers 310,780,076 - - - 310,780,076 Other assets 4,898,168 - - - 4,898,168 586,746,793 46,654,419 3,231,157 - 636,632,370 Financial liabilities at amortised cost Deposits from banks - - - 155,060 155,060 Deposits from customers - - - 555,213,730 555,213,730 Derivative liabilities - - 4,769 - 4,769 Refinance loans - - - 83,949 83,949 Current income tax payable - - Other liabilities - - - 12,736,999 12,736,999 - - 4,769 568,189,738 568,194,507 At 31 December 2016 Financial assets Cash and bank balances with the Central Bank 78,291,922 - - 78,291,922 Deposits and balances due from banking institutions 80,025,296 - - 80,025,296 Derivative financial instruments - - 376,700 - 376,700 Government securities; Held-to-maturity - 99,870,917 - 99,870,917 Government securities; Held-for-trading - - - - - Loans and advances to customers 250,755,828 - - - 250,755,828 Other assets 3,524,303 - - - 3,524,303 412,597,349 99,870,917 376,700 - 512,844,966 Financial liabilities at amortised cost Deposits from banks - - - 3,613,008 3,613,008 Deposits from customers - - - 423,624,540 423,624,540 Derivative liabilities - - 40,476 - 40,476 Refinance loans - - - 120,870 120,870 Other liabilities - - - 16,997,627 16,997,627 - - 444,356,045 444,396,521

Annual Report and Consolidated Financial Statements 78 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS

2016 2016 Separate Ushs ‘000 Separate 7,260,056 35,358,059 80,025,295 10,009,863 20,840,700 Ushs ‘000 28,098,003 10,009,863 78,291,922 35,358,059 32,924,000 146,233,918 -

2017 2017 Separate Separate 5,003,904 Ushs ‘000 5,003,904 Ushs ‘000 44,488,161 32,730,039 11,758,122 93,832,065 44,488,161 44,340,000 177,236,485 226,728,550

2016 2016 Ushs ‘000 35,358,059 80,068,753 10,009,863 20,840,700 7,260,056 Ushs ‘000 146,277,375 28,098,003 10,009,863 78,291,922 35,358,059 32,924,000 Consolidated Consolidated - 2017 2017 5,003,904 Ushs ‘000 5,003,904 Ushs ‘000 32,730,039 11,758,122 93,832,065 44,488,161 44,340,000 226,740,189

Consolidated 44,488,161 177,248,124 Consolidated Annual Report and Consolidated Financial Statements For the year ended 31 December 2017

AND CASH EQUIVALENTS CASH CASH AND BALANCES WITH CENTRAL BANK WITH AND BALANCES CASH

79 Cash in hand bank other Balances with the Central deposits than mandatory reserve Included in cash and cash equivalents Included in cash and (Note 17) deposits with Mandatory reserve Central Bank agreements Repurchase Cash and balances with the Central Bank (Note 15) Deposits and balances due from banking institutions (Note 17) Repurchase agreements Repurchase Treasury bills maturing within 90 days bills maturing Treasury (Note 19) 16. For the purpose of the consolidated include: and separate statement of cash flows, cash and cash equivalents 15. Mandatory reserve deposits are not available for use in day-to-day the operations. Bank’s Cash-in-hand and non-interest-bearing. deposits are reserve balances with the Central Bank and mandatory The required cash reserve with Bank of Uganda as at cash is earningratio non-interest requirement and 31 is based on the value of customer deposits as adjusted December by 2017 was Ushs: 44,340 million. The the Bank of Uganda. The cash reserves held are allowed to minimum fluctuate than to lower not less not than is 50% period of weeks the two mandatory specified the for average the provided day given a on requirement subject to sanctions for non-compliance. are and requirements, For the purposes of the statement of cash and bills flows,Treasury Banks, with balances and cash including: cashacquisition of date the from maturity days 90 than and cash equivalents comprise balances with less other eligible bills, and amounts due from other banks. Cash and cash equivalents exclude the cash reserve held with the Bank of Uganda. requirement Banks are required to maintain a prescribed minimum cash available balance to with finance the the Bank bank’s day-to-day of activities. Uganda Whilst that weeks. 2 of period cycle reserve is cash a over deposits customer outstanding sanctions average The the not of are percentage there amountday given a is determinedon margin the of 50% to fall may byand activities Bankbank’s ofthe in use Uganda as a for available is it for non-compliance. As at 31 the December, reserve requirement was Ushs 44.34 billion (2016: Ushs 32.92 billion). 17. DEPOSITS AND BALANCES DUE FROM BANKING INSTITUTIONS 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Balances due from other banking institutions 59,515,528 44,138,166 59,503,889 44,094,709 Placements with other banks 117,732,596 35,930,587 117,732,596 35,930,587 177,248,124 80,068,753 177,236,485 80,025,296

18. DERIVATIVE FINANCIAL INSTRUMENTS Derivatives held for trading are generally related to products that the Bank provides to its customers. The Bank may also take positions with the expectation of profiting from favourable movements in rates. Most of the trading portfolio is within the Bank’s treasury department and is treated as trading risk for risk management purposes. The table below shows the fair values of derivative financial instruments recorded as assets or liabilities together with their notional amounts. The notional amount, recorded gross, is the quantity of the derivative contracts’ underlying instrument. The notional amounts indicate the volume of transactions outstanding at the year end and are not indicative of either the market risk or credit risk.

Carrying Carrying amount Notional amount amount value Notional amount value asset assets liabilities liabilities At 31 December 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Derivatives held for trading Foreign exchange contracts 1,551,136 44,414,570 4,769 42,868,203 Total 1,551,136 44,414,570 4,769 42,868,203 At 31 December 2016 Derivatives held for trading Foreign exchange contracts 376,700 26,263,244 40,476 25,927,020 Total 376,700 26,263,244 40,476 25,927,020

Government securities 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Securities held-to-maturity Treasury bills Face value Maturing within 90 days - 20,840,700 - 20,840,700 Maturing after 90 days 8,500,000 43,000,000 8,500,000 43,000,000 8,500,000 63,840,700 8,500,000 63,840,700 Unearned interest (592,278) (4,258,622) (592,278) (4,258,622) 7,907,722 59,582,078 7,907,722 59,582,078 Treasury Bonds Face value Maturing within 90 days - - - - Maturing between 90 and 365 days - 33,865,480 - 33,865,480 Maturing after 365 days 46,754,059 13,679,848 46,754,059 13,679,848 46,754,059 47,545,328 46,754,059 47,545,328 Unearned interest (8,007,362) (7,256,489) (8,007,362) (7,256,489) 38,746,697 40,288,839 38,746,697 40,288,839 Total securities held to maturity 46,654,419 99,870,917 46,654,419 99,870,917

Annual Report and Consolidated Financial Statements 80 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS - - - - 2016 2016 2016 80,000 80,000 Separate Separate Separate Ushs ‘000 Ushs ‘000 Ushs ‘000 1,880,069 41,884,777 37,887,893 254,074,802 139,573,247 101,685,355 112,621,486 - 2017 2017 2017 80,000 80,000 Separate (140,991) Ushs ‘000 7,978,860 Separate Separate Ushs ‘000 Ushs ‘000 65,800,276 57,821,415 60,445,411 1,821,012 1,821,012 318,487,259 252,686,983 192,241,572 ------76 217 501 558 2016 2016 2016 2016 Ushs ‘mn Ushs ‘000 Ushs ‘000 Ushs ‘000 1,880,069 41,884,777 37,887,893 254,074,802 139,573,247 101,685,355 112,621,486 Consolidated Consolidated Consolidated - - - 6 77 188 565 2017 2017 2017 2017 (140,991) Ushs ‘mn Ushs ‘000 Ushs ‘000 Ushs ‘000 7,978,860 1,821,012 1,680,021 1,821,012 65,800,276 57,821,415 60,445,411 318,487,259 252,686,983 192,241,572 Consolidated Consolidated Consolidated Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 LOANS AND ADVANCES TO LOANS AND ADVANCES CUSTOMERS INVESTMENT IN SUBSIDIARY HELD-TO-TRADE SECURITIES

81 Unearned interest Total securities held for trading Total Total investment in subsidiary Total – Equity Stock Brokers Limited – Equity Stock Brokers Equity securities – at cost: Face value days Maturing within 90 Maturing after 90 days Profit after tax Profit Corporate Retail Revenue - Term loans - Term - Term loans - Term Total liabilities Total Corporate - Overdrafts Retail - Overdrafts Total assets Total financial statements Limited’s Summary of Equity Stock Brokers The principal place of business of Equity Stock Ltd Brokers is Kampala. The Bank owns 80% (2016: 80%) of year the for Ltd Shoal to allocated been has that profit the Further Shoal. by owned is 20% while company the Ushs. is interest non-controlling accumulated The 43.3mn). Ushs (2016: 1.2mn Ushs. is 2017 Dec 31st ended 95.4mn (2016: Ushs 94.1mn). 21. 20.

19. NOTES TO THE FINANCIAL STATEMENTS (continued) 21. Loans and Advances to Customers (continued)

2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Gross loans and advances to customers 318,487,259 254,074,802 318,487,259 254,074,802 Less: allowance for impairment (7,707,183) (3,318,974) (7,707,183) (3,318,974) Net loans and advances to customers 310,780,076 250,755,828 310,780,076 250,755,828 Gross advances to customers by industry composition: - Trade and commerce 84,458,739 58,667,114 84,458,739 58,667,114 - Agriculture 58,818,125 39,149,700 58,818,125 39,149,700 - Manufacturing 35,836,624 23,114,327 35,836,624 23,114,327 - Transport & communication 16,706,999 14,223,992 16,706,999 14,223,992 - Building and construction 62,329,296 72,828,900 62,329,296 72,828,900 - Personal, service industry and others 60,337,476 46,090,769 60,337,476 46,090,769 Gross advances to customers 318,487,259 254,074,802 318,487,259 254,074,802

Reconciliation of allowance account for losses on loans and advances to customers is as follows: 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate At 1 January 3,318,974 4,709,112 3,318,974 4,709,112 Increase in the provision for loan impairment; -Individually assessed as Per IAS 39 5,195,545 302,967 5,195,545 302,967 -Collectively assessed as Per IAS 39 1,058,234 2,527,987 1,058,234 2,527,987 Restatement of the previously written off provision on specific write offs 2,416,362 - 2,416,362 - Write offs during the year (3,533,258) (4,221,093) (3,533,258) (4,221,093) At 31 December 7,707,183 3,318,974 7,707,183 3,318,974

Identified Impairment 4,120,962 790,987 4,120,962 790,987 Unidentified Impairment 3,586,221 2,527,987 3,586,221 2,527,987 7,707,183 3,318,974 7,707,183 3,318,974 Charge to the statement of comprehensive income Net increase in the provision for loan impairment 6,253,779 2,830,954 6,253,779 2,830,954

The Bank holds the following collateral as security for its loans and advances: buildings, land, deposits, margins accounts, plant, machinery and stock among others.

Annual Report and Consolidated Financial Statements 82 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS - 2016 2016 Separate (354,615) (204,305) Separate Ushs ‘000 2,390,520 3,878,921 6,269,441 Ushs ‘000 (2,756,366) 2,906,676 - 2017 2017 34,532 204,305 (204,305) Separate Separate Ushs ‘000 2,789,073 Ushs ‘000 2,968,488 1,929,680 4,898,168 (2,823,606) - - 2016 2016 (349,942) (196,846) Ushs ‘000 2,526,246 3,878,918 6,405,164 Ushs ‘000 (2,847,699) 3,000,795 Consolidated Consolidated 2017 2017 (5,742) 34,532 204,305 (196,847) 2,792,224 Ushs ‘000 Ushs ‘000 3,093,931 1,929,679 5,023,610 (2,839,956) Consolidated Consolidated Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 CURRENT INCOME TAX PAYABLE / (RECOVERABLE) PAYABLE TAX CURRENT INCOME OTHER ASSETS

83 Prepayments Other receivables Balance as at 1 January Write off of opening receivable off of opening Write Prior year under-provision Current tax charge Current Tax paid - current year paid - current Tax Balance as at 31 December Prepayments include among receivable commission and charges advance mainly of comprises receivables Other others. payments among maintenance made for insurance, others. advertisement, stationary and software 23. 22. - - Total (797,189) (748,095) (354,222) (279,852) Ushs’000 4,710,717 1,065,718 9,693,439 29,860,102 30,778,464 30,778,464 38,765,526 (3,312,789) (1,072,303) - - - - - Work In Work 805,366 805,366 Progress (279,852) Ushs’000 1,039,981 3,864,486 8,665,233 4,545,284 (4,099,101) (3,573,160) (1,072,303) - - - - Office 59,568 44,249 234,706 630,149 580,301 (276,477) (116,425) Ushs’000 5,437,416 6,025,794 6,025,794 6,593,487 Equipment ------Motor (1,245) 81,464 vehicles (474,231) 831,203 831,203 829,958 Ushs’000 1,223,971 - - - - 6,539 (3,165) (29,208) 247,347 (33,113) 311,020 & SWIFT Ushs’000 Computer ATM, POS ATM, 8,724,366 8,949,044 8,949,044 2,600,748 Equipment, 11,824,534 - - - - 41,549 (17,203) (41,084) 238,533 118,404 150,385 (194,867) Ushs’000 Furniture, 2,873,670 3,213,404 3,213,404 3,169,387 room & Safes room Fixtures, Strong Strong Fixtures, - - - - - (69) (8,573) 44,182 31,220 95,337 388,360 Ushs’000 4,706,669 4,782,001 4,782,001 5,257,124 Leasehold improvements ------(748,095) Ushs’000 Buildings 4,807,377 1,065,718 5,125,000 5,125,000 4,060,000 (1,065,000) ------Land 374,098 Ushs’000 1,046,652 1,046,652 1,046,652 1,065,000 2,485,750 PROPERTY AND PROPERTY EQUIPMENT

COST or VALUATION At 1 January 2016 Additions Disposals Transfer from WIP (Note 26) from Transfer Elimination of accumulated depreciation Increase on revaluation Increase At 31 December 2016 At 1 January 2017 Additions Disposals Transfer from WIP from Transfer WIP write off during the year Transfer to intangibles (note 26) Transfer Reclassification At 31 December 2017 24. Consolidated

Annual Report and Consolidated Financial Statements 84 For the year ended 31 December 2017

OVERVIEW GOVERNANCE FINANCIAL STATEMENTS

to the profit and loss, as well as transferred to intangible assets of Ushs (‘000) 3,311,721. (‘000) Ushs of assets intangible to transferred as well as loss, and profit the to

not capitalised and expensed off during the current period. In 2017, the transfers out of work in progress included items that were not capitalised and expensed expensed and capitalised not were that items included progress in work of out transfers the 2017, In period. current the during off expensed and capitalised not

Work in progress relates to infrastructure for the mobile application, firewall and server that are being installed. The work in progress relates to items that were were that items to relates progress in work The installed. being are that server and firewall application, mobile the for infrastructure to relates progress in Work

At 31 December 2016 December 31 At 11,541,193 11,541,193 805,366 1,784,301 167,685 721,265 1,001,531 1,977,096 4,708,875 375,074

16,896,456 16,896,456 4,545,284 1,753,587 71,600 2,689,743 896,164 1,882,139 3,421,654 1,636,285 2017 December 31 At

3,421,654 3,421,654 At valuation At ------3,421,654 -

13,474,802 13,474,802 4,545,284 4,545,284 1,753,587 71,600 2,689,743 896,164 1,882,139 - 1,636,285 cost At

NET CARRYING AMOUNT CARRYING NET

At 31 December 2017 December 31 At 21,869,066 21,869,066 - 4,839,900 758,358 9,134,791 2,273,223 3,374,985 638,346 849,465

- - depreciation ------

Elimination of accumulated accumulated of Elimination

(263,224) Eliminated on disposal on Eliminated - - (94,117) (1,245) (32,702) (127,493) (7,668) - -

(581) Reclassification - - 35,071 - (3,164) (31,907) - (61,979) 61,398

2,895,019 2,895,019 Charge for the year the for Charge - - 656,871 96,085 942,877.48 220,749 577,748 284,200 116,489

19,237,271 19,237,271 - - 4,241,493 663,518 8,227,779 2,211,873 2,804,905 416,125 671,578 At 1 January 2017 January 1 At

At 31 December 2016 December 31 At 4,241,493 4,241,493 663,518 8,227,779 2,211,873 2,804,905 416,125 671,578 19,237,270 19,237,270 -

(748,095) depreciation (748,095) ------

Elimination of accumulated accumulated of Elimination

(752,514) Eliminated on disposal on Eliminated (262,946) (448,790) (29,188) (11,522) (67) - - - -

2,507,727 2,507,727 Charge for the year the for Charge 547,032 547,032 281,044 40,361 645,622 645,622 146,468 634,321 212,879 - -

18,230,152 18,230,152 3,858,817 3,858,817 965,840 7,622,646 2,010,516 2,257,940 883,176 631,217 - - At 1 January 2016 January 1 At ACCUMULATED DEPRECIATION ACCUMULATED

Annual Report and Consolidated Financial Statements For the year ended 31 December 2017

Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000

Equipment Progress Total Buildings Land vehicles SWIFT & Safes & room improvements

Office Office Work In In Work Motor Motor POS ATM, Strong Fixtures, Leasehold

Equipment, Equipment, Furniture, Computer Computer 85 - - Total (797,189) (748,095) (354,222) (279,852) Ushs’000 4,710,717 1,065,718 9,693,439 (3,312,789) (1,072,303) 29,848,856 30,767,218 30,767,218 38,754,280 - - - - - Work In Work 805,366 805,366 (279,852) Progress Ushs’000 1,039,981 3,864,486 8,665,233 4,545,284 (4,099,101) (3,573,160) (1,072,303) - - Office 59,568 44,249 234,706 630,149 580,301 Ushs’000 (276,477) (116,425) 5,437,416 6,025,794 6,025,794 6,593,487 Equipment ------Motor (1,245) 81,464 831,203 831,203 829,958 vehicles (474,231) Ushs’000 1,223,971 - - (3,165) 6,539 SWIFT (29,208) (33,113) 247,347 311,020 Ushs’000 Computer 8,713,120 8,937,799 8,937,799 2,600,748 Equipment, 11,813,289 ATM, POS & ATM, - - (17,203) (41,084) 41,549 238,533 118,404 150,385 (194,867) Ushs’000 Furniture, 2,873,670 3,213,404 3,213,404 3,169,387 room & Safes room Fixtures, Strong Strong Fixtures, - - - (69) (8,573) 44,182 31,220 95,337 388,360 Ushs’000 4,706,668 4,782,000 4,782,000 5,257,123 Leasehold improvements ------(748,095) Ushs’000 Buildings (1,065,000) 4,807,377 1,065,718 5,125,000 5,125,000 4,060,000 ------Land 374,098 Ushs’000 1,046,652 1,046,652 1,046,652 1,065,000 2,485,750 COST or VALUATION At 1 January 2016 Additions Disposals Transfer from WIP (Note 26) from Transfer Elimination of accumulated depreciation Increase on revaluation Increase At 31 December 2016 At 1 January 2017 Additions Disposals Transfer from WIP from Transfer WIP write off during the year Transfer to intangibles (note Transfer 26) Reclassification At 31 December 2017 Bank NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS and Equipment (continued) 24. Property

Annual Report and Consolidated Financial Statements 86 For the year ended 31 December 2017

OVERVIEW GOVERNANCE FINANCIAL STATEMENTS

and loss, as well as transferred to intangible assets of Ushs (‘000) 3,311,721. (‘000) Ushs of assets intangible to transferred as well as loss, and

capitalised and expensed off during the current period. In 2017, the transfers out of work in progress included items that were not capitalised and expensed to the profit profit the to expensed and capitalised not were that items included progress in work of out transfers the 2017, In period. current the during off expensed and capitalised

Work in progress relates to infrastructure for the mobile application, firewall and server that are being installed. The work in progress relates to items that were not not were that items to relates progress in work The installed. being are that server and firewall application, mobile the for infrastructure to relates progress in Work

11,538,262 11,538,262 805,366 1,784,301 167,685 718,334 1,001,532 1,977,095 4,708,875 375,074 2016 December 31 At

16,895,324 16,895,324 4,545,284 1,753,587 71,600 2,688,610 896,166 1,882,138 3,421,654 1,636,285 2017 December 31 At

3,421,654 3,421,654 At valuation At ------3,421,654 -

13,473,670 13,473,670 4,545,284 4,545,284 1,753,587 71,600 2,688,610 896,166 1,882,138 - 1,636,285 cost At

NET CARRYING AMOUNT CARRYING NET

21,858,954 21,858,954 - 4,839,900 758,358 9,124,679 2,273,221 3,374,985 638,346 849,465 2017 December 31 At

(263,224) Eliminated on disposal on Eliminated - - (94,117) (1,245) (32,702) (127,493) (7,668)

(581) 35,071 35,071 (3,164) (31,907) (61,979) 61,398 Reclassification

2,893,223 2,893,223 - - 656,871 96,085 941,081 220,749 577,748 284,200 116,489 year the for Charge

19,228,955 19,228,955 - - 4,241,493 663,518 8,219,464 2,211,872 2,804,905 416,125 671,578 At 1 January 2017 January 1 At

At 31 December 2016 December 31 At 4,241,493 4,241,493 663,518 8,219,464 2,211,872 2,804,905 416,125 671,578 19,228,955 19,228,955 -

(748,095) depreciation (748,095) ------

Elimination of accumulated accumulated of Elimination

(752,514) Eliminated on disposal on Eliminated (262,946) (448,790) (29,188) (11,522) (67) - - - -

2,505,071 2,505,071 Charge for the year the for Charge 645,622 645,622 146,468 631,664 212,879 547,032 281,044 40,361 - -

18,224,494 18,224,494 3,858,817 3,858,817 965,840 7,616,988 2,010,516 2,257,940 883,176 631,217 - - At 1 January 2016 January 1 At ACCUMULATED DEPRECIATION ACCUMULATED

Annual Report and Consolidated Financial Statements For the year ended 31 December 2017

Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000

Equipment Progress Total room & Safes & room improvements Buildings Land vehicles SWIFT

Office Office Work In In Work ATM, POS & & POS ATM, Strong Fixtures, Leasehold Motor Motor

Equipment, Equipment, Furniture, Computer Computer 87 NOTES TO THE FINANCIAL STATEMENTS (continued) 24. Property and Equipment (continued)

Reconciliation of the carrying amount 2017 Ushs’000 Carrying amount as at 1 January 2017 4,708,875 Reclassification (net) (1,003,021) Depreciation for the year (284,200) Carrying amount and fair value as at 31 December 2017 3,421,654

If the buildings were measured using the cost method, the carrying amounts would be as follows: 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Buildings (cost) 3,318,264 3,318,264 3,318,264 3,318,264 Reclassification (net) (1,003,021) (1,003,021) Accumulated depreciation (700,325) (2,951,245) (700,325) (2,951,245) Net carrying amount 3,421,654 4,708,875 3,421,654 4,708,875

25. INTANGIBLE ASSETS 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Cost At 1 January 13,860,809 10,332,711 13,860,809 10,332,711 Additions 333,323 216,377 333,323 216,377 Disposal (15,629) - (15,629) - Transfer from work in progress 1,072,303 3,311,721 1,072,303 3,311,721 (Refer to note 24) At 31 December 2017 15,250,806 13,860,809 15,250,806 13,860,809 Accumulated amortisation At 1 January 9,942,519 7,281,061 9,942,519 7,281,061 Disposal (15,601) - (15,601) - Amortisation charge 2,048,661 2,661,458 2,048,661 2,661,458 At 31 December 2017 11,975,579 9,942,519 11,975,579 9,942,519 Net carrying amount 3,275,227 3,918,290 3,275,227 3,918,290

Annual Report and Consolidated Financial Statements 88 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS Total Total 319,715 292,007 832,141 (65,521) Shs’000 319,715 292,007 832,141 (65,521) Shs’000 (907,480) (907,480) (1,931,762) (1,931,762) (22,791,061) (23,990,548) (22,791,061) (21,945,634) (22,791,061) (22,791,061) (23,990,548) (21,945,634) ------100,867 100,867 100,867 Shs’000 100,867 100,867 Shs’000 100,867 financial financial (100,867) (100,867) Derivative Derivative instruments instruments - - - - - tax on tax on (65,521) surplus (65,521) surplus 701,135 319,715 993,142 738,948 993,142 Shs’000 319,715 993,142 738,948 Shs’000 993,142 701,135 (292,007) Deferred Deferred (292,007) Deferred Deferred revaluation revaluation revaluation revaluation ------Shs’000 Shs’000 (292,975) (292,975) (1,468,595) (1,468,595) Tax Losses Tax (22,211,544) (20,742,949) Tax Losses Tax (22,504,519) (22,211,544) (22,211,544) (20,742,949) (22,211,544) (22,504,519) ------for loan Shs’000 for loan Charges Shs’000 707,448 Charges 707,448 (217,275) (305,149) (305,149) (217,275) (1,066,017) (1,468,316) (1,283,292) (1,066,017) (1,066,017) (1,468,316) (1,066,017) (1,283,292) impairment impairment ------tax tax 124,693 Shs’000 124,693 Shs’000 (473,317) (258,885) (607,509) (296,363) (607,509) (903,872) (607,509) (296,363) (473,317) (258,885) (903,871) (607,509) Accelerated Accelerated depreciation depreciation Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 DEFERRED TAX INCOME

At 31 December 2016 89 At 31 December 2016 At 31 December 2017 Prior year deferred tax Prior year deferred adjustment Charged to equity Charged to other income comprehensive Charged to equity At 31 December 2017 At 1 January 2016 to Charged/credited profit At 1 January 2017 to Charged/credited profit Prior year deferred tax tax Prior year deferred adjustment Charged to equity to Charged/credited other comprehensive income Charged to equity At 1 January 2016 to Charged/credited profit At 1 January 2017 to Charged/credited profit Bank Consolidated income tax asset a) Deferred 26. Deferred income tax is calculated using the enacted income tax rate of 30% (2016: 30%). The movement on follows: tax account is as income the deferred NOTES TO THE FINANCIAL STATEMENTS (continued) 26. Deferred Income Tax (continued) b) Deferred income tax liability 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Accelerated tax depreciation As at 1 January 879 - - - Charged/credited to profit or loss (539) 879 - - As at 31 December 340 879 - -

Deferred assets amounting to Ugx 23.99 bn in respect to carry forward tax losses of Ugx75 bn have been recognised. In the opinion of the Directors, the Bank is projected to have sufficient future taxable future profits to utilise the tax credits.

27. DEPOSITS FROM BANKS 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Deposits due to other banks 155,060 3,613,008 155,060 3,613,008 155,060 3,613,008 155,060 3,613,008

28. CUSTOMER DEPOSITS Deposits due to customers primarily comprise savings deposits, amounts payable on demand, and term deposits. 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Demand deposits 230,088,714 202,021,598 230,174,483 202,197,895 Time deposits 224,427,679 138,842,268 224,763,205 139,042,268 Savings accounts 100,276,042 82,384,377 100,276,042 82,384,377 554,792,435 423,248,243 555,213,730 423,624,540 Private enterprises and individuals 507,170,129 412,252,216 507,591,424 412,628,513 Government and parastatals 47,622,306 10,996,027 47,622,306 10,996,027 554,792,435 423,248,243 555,213,730 423,624,540 Segment analysis Corporate 210,626,496 116,878,984 210,626,496 116,878,984 Retail 344,165,939 306,369,259 344,587,234 306,745,556 554,792,435 423,248,243 555,213,730 423,624,540

Annual Report and Consolidated Financial Statements 90 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS 2016 2016 2016 76.50 20.25 96.75 shares 120,870 120,870 Millions Separate Separate Separate 3,896,802 Ushs ‘000 Ushs ‘000 Ushs ‘000 15,250,221 19,147,023 96,750,000 96,750,000 96,750,000 96,750,000 Total value of Total 2017 2017 2017 1,000 1,000 1,000 96.75 83,949 83,949 Millions Separate Separate Separate Ushs ‘000 Ushs ‘000 3,893,387 8,843,612 Ushs ‘000 - 12,736,999 1,000 96.75 Value per share per Value 2016 2016 2016 76.50 20.25 96.75 120,870 120,870 Millions Ushs ‘000 3,902,408 Ushs ‘000 Ushs ‘000 15,318,779 19,221,187 (thousands) 96,750 96,750 96,750 96,750 Consolidated Consolidated Consolidated - Number of shares Number of shares issued & fully paid 2017 2017 2017 96.75 96.75 Millions Ushs ‘000 3,931,618 8,887,070 Ushs ‘000 83,949 83,949 12,818,688 Consolidated Consolidated Consolidated

Annual Report and Consolidated Financial Statements For the year ended 31 December 2017

ISSUED CAPITAL OTHER LIABILITIES REFINANCE LOANS REFINANCE

91 At 31 December 2017 At 31 December 2016 Number of shares 2017 At 1 January 2017 and December 2017 2016 At 1 January 2016 and December 2016 Consolidated and Separate APEX III/Agricultural Credit Facility Credit APEX III/Agricultural (ACF) Loans At 1 January Provisions and accruals Provisions Increase in shares Increase As at 31 December Other Total Total The refinance loans with Bank of Uganda are denominated in Uganda Shillings (Ushs) and are unsecured. They unsecured. are and (Ushs) Shillings Uganda in denominated are Uganda of Bank with loans refinance The June 2018. in of 10% and mature attract interest capital of the bank in May 2016 with Ugx 20.25bn. (20.25mn shares). the share increased The shareholders value par a with million) 96.75 (2016: million 96.75 was end year at up paid shares ordinary of number total The issue for authorised shares ordinary of number total The share). per 1,000 Ushs (2016: share per 1,000 Ushs of is 100 million. 31. 30. accounts liability transit items, sheet balance off for held margins to relates below mentioned liabilities other The payable among others. and statutory deductions The margin and transit liability accounts do not attract any interest rate. They are cash collateral accounts for the off balance sheet items. 29. 32. REVALUATION RESERVE The revaluation reserve shows the effects from the revaluation of buildings after deduction of deferred income taxes. Changes in the revaluation surplus may be transferred to retained earnings in the subsequent periods as the asset is used or when it is derecognised.

The revaluation reserve relates to surplus on revalued property and is not available for distribution to shareholders. 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate At start of year 3,116,160 2,601,106 3,116,160 2,601,106 Transfer of excess depreciation net of tax (683,608) (230,949) (683,608) (230,949) Increase in revaluation surplus - 746,003 - 746,003 At end of year 2,432,552 3,116,160 2,432,552 3,116,160

33. CREDIT RISK RESERVE The statutory credit risk reserve represents an appropriation of retained earnings to comply with the Financial Institutions Act, 2004. The balance in the reserve represents the extent to which provisions for loan losses determined in accordance with the Financial Institutions Act, 2004 exceed amounts determined in accordance with IFRS. The reserve is not distributable.

Below is the reconciliation of the statutory credit risk reserve per the Bank of Uganda guidelines and per IFRS: 2017 2016 2017 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Provisions as per Bank of Uganda guidelines (Note 21) Specific provisions 3,644,890 2,944,341 3,644,890 2,944,341 General Provisions 3,672,689 3,357,070 3,672,689 3,357,070 7,317,579 6,301,411 7,317,579 6,301,411 Provisions as per IFRS guidelines (Note 21) Individual impairment 4,120,962 790,987 4,120,962 790,987 Collective impairment 3,586,221 2,527,987 3,586,221 2,527,987 7,707,183 3,318,974 7,707,183 3,318,974 Statutory credit risk reserve (389,604) 2,982,438 (389,604) 2,982,438

34. DIVIDENDS PAYABLE The directors do not recommend the payment of dividends for the year (2016: Nil).

Annual Report and Consolidated Financial Statements 92 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS 2016 2016 2016 (950,570) Separate Separate Ushs ‘000 1,250,476 1,797,819 2,097,725 Ushs ‘000 Ushs ‘000 49,929,030 5,496,220 376,297 17,685,465 2,783,527 336,224 52,522,033 123,256,279 2017 2017 2017 440,487 488,215 (824,226) Separate Separate 2,331,476 1,546,367 2,097,725 1,761,714 Ushs ‘000 Ushs ‘000 Ushs ‘000 30,118,938 26,801,547 40,118,122 13,553,919 100,916,450 2016 2016 (950,570) Ushs ‘000 1,250,476 1,797,819 2,097,725 Ushs ‘000 17,685,465 2,783,527 49,929,030 336,224 52,522,033 123,256,279 Consolidated Consolidated 2017 2017 488,215 (824,226) 2,097,725 1,761,714 Ushs ‘000 Ushs ‘000 Consolidated Consolidated 30,118,938 2,331,476 26,801,547 1,546,367 40,118,122 100,916,450 Annual Report and Consolidated Financial Statements For the year ended 31 December 2017

RELATED-PARTY DISCLOSURES RELATED-PARTY COMMITMENTS AND CONTINGENT LIABILITIES CONTINGENT AND COMMITMENTS

93 Opening balance in provision Increase (payments and in provision Decrease adjustments) Closing balance a) Related party balances Deposits from directors and shareholders directors Deposits from Ltd Equity Stock Brokers Deposits from Loan commitments Performance Bonds Guarantees contracts currency Foreign Documentary and letters of credit Total Transactions and balances with related parties as at the yearend were as follows: were parties as at the yearend and balances with related Transactions 36. Loan commitments, guarantee and other financial facilities Loan commitments, guarantee and guarantees credit, of letters acceptances, involving business conducts Bank the banks, other with common In and performance bonds. The majority of parties. these facilities are offset by corresponding obligationsthird of The directors believe that the resolution of pending legal cases will provided. already not give rise to losses above amounts Capital commitments commitments of Ushs 3.48 bn (2016: Ushs 805 million). At 31 December 2016, the Bank had capital 35. day to day banking normal from cases which arise is a litigant in several The Bank supported - 2017 December 31 at as outstanding cases the all of assessment an out carried have Directors The case, each of merits the on based necessary considered where and - advice legal professional independent by 2,098 Shs (2016: million 1,762 Shs to amounting provisions total the aggregate In raised. been has provision a in the legal provision: Below is the schedule of movement million) has been made. NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Related-Party Disclosures (continued)

b) Related party transactions 2017 2016 Ushs ‘000 Ushs ‘000 Interest: Interest paid to related parties/directors 498,555 549,779 Interest paid to Equity Stock Brokers Ltd 46,159 11,436 Directors’ remuneration Directors’ fees 708,143 776,905 Other emoluments 327,293 438,618 1,035,436 1,215,523

c) Key management compensation-Orient Leadership Team 2017 2016 Ushs ‘000 Ushs ‘000 Salaries and short-term benefits 951,522 1,036,369 Defined contribution benefits 161,923 70,293

37. PRIOR YEAR RESTATEMENTS

2016 2016 2016 2016 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Previously Previously stated Restated stated Restated Cash and balances with Central Bank 68,282,059 78,291,922 68,282,059 78,291,922 Deposits and balances due from banking institutions 90,078,616 80,068,753 90,035,159 80,025,296

Certain reclassifications have been made to the prior year’s financial statements to enhance comparability with the current year’s financial statements. The repurchase agreements (“repos”) with Bank of Uganda are financial assets of short term maturity less than 90 days and as a result, these repos have been reclassified from Government Securities to Cash and Balances with Bank of Uganda.

The statements of financial position and the related notes to the financial statements and Comparative figures have been adjusted to conform to the current year’s presentation.’

Annual Report and Consolidated Financial Statements 94 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS All equity investments are to the be statement of measured financial position in at fair value, loss or profit in recognised losses and gains with for held not is investment equity an if that except recognised consideration contingent nor trading, combination to in a business by an acquirer which IFRS 3 applies, an to measure can be made at initial recognition irrevocable election the investment at FVTOCI, with dividend income or loss. in profit recognised A debt instrument the collect to is objective whose model business that (i) is contractual cash held flows and (ii) within has contractual cash a flows that are solely payments of principal on the principal amount outstanding and interest must at be amortised measured cost (net of any write down for impairment), unless is designated at the fair value asset though profit or loss value option. (FVTPL) under the fair Debt instrument that (i) is held within a business model whose objective is collecting achieved contractual both cash by flowsfinancial assets and (ii) has and selling contractual terms that give dates to cash rise flows that are solely payments on of specified principal amount on the a principal and interest outstanding must be unless measured the asset is at designated at FVTPL FVTOCL, under the fair value option. at All other debt instruments must be measured FVTPL. ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ assets that are currently within the scope of IAS 39 will be subsequently measured at either 9. Specifically: value under IFRS cost or fair amortised The business model reflects how groups of financial assets are managed to achieve a particular business objective. Financial assets to held in order amortised cost if the instruments are can only be collect the contractual held cash flows (‘hold to at collect’), and where those contractual cash flowsare payments solely of principal and interest (SPPI). the Principal represents fair value of the instrument at the time represents context this in Interest recognition. initial of compensation for the time value of money and associated credit risks together with compensation for other risks and costs consistent with a basic lending arrangement and a profit margin. This requires an assessment at initial of the contractual terms to determine recognition whether it contains a term timing that could or change amount the of cash inconsistent with the SPPI criteria. flows in a way that is Assets may be sold out of ‘hold to collect’ portfolios risk. is in Disposals an credit there for increase where

Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 The classification andfinancial assets and financial liabilities measurement of and Impairment methodology, General hedge accounting. IFRS revised 9 in (as 2014) will Financial supersede IAS Instruments: 39 Recognition date. upon its effective Measurement and

a. b. c. 95 The standard is effective for annual period beginning on or after application permitted 1 if, January and only without 2018 if, the it with use is of possible retrospective advantage of the exemption hindsight. allowing it not to restate The bank will comparative take information respect to for classification and measurement including prior impairment changes. periods with assets financial of amounts carrying the in Differences and financial liabilitiesresulting from the adoption of IFRS 9 will be recognised in retained earnings as at 1 January 2018. reserves and

Phase 1: Classification and measurement of Phase 1: Classification and measurement financial assets and financial liabilities a principles-based approach IFRS 9 introduces to the classification of three financial assets. measurement classifications are There amortised under cost, IFRS fair 9: (FVTPL) value and, for through financial assets, fair profit value through other or comprehensive income (FVOCI) loss based on the nature of the cash flows of the assets and an entity’s business model. These categories classifications replace of the FVTPL, availableloans existing and receivables, for and IAS held-to-maturity. Equity sale (AFS), instruments 39 are measured at are FVTPL, not held for trading unless purposes, in which they case an recognition initial on made be can election irrevocable to measure them at or loss. to profit reclassification FVOCI with no subsequent With respect to the classification and measurement, the number of categories of financial assetsIFRS under 9has been reduced, all recognised financial In July 2014, the IASB finalised the reform of financial In July 2014, the IASB finalised the revised (as 9 IFRS issued and accounting instruments for; the requirements in 2014), which contains Supplementary Information to the Annual Supplementaryto the Information Separate Consolidated and Report and Statements Financial in Instruments (as revised IFRS 9 Financial for annual periods beginning 2014) (effective 2018) –Supplementary on or after 1 January disclosures APPENDIX: other reasons are permitted but such sales should be equity investments which are irrevocably designated insignificant in value or infrequent in nature. at FVOCI.

Financial asset debt instruments where the business Phase 2: Impairment of Financial Assets model objectives are achieved by collecting the The impairment model under IFRS 9 reflects expected contractual cash flows and by selling the assets (‘hold credit losses, as opposed to incurred credit losses to collect and sell’) and that have SPPI cash flows under IAS 39. Under the impairment approach in are held at FVOCI, with unrealised gains or losses IFRS 9, it is no longer necessary for a credit event deferred in reserves until the asset is derecognised. to have occurred before credit losses are recognised. In certain circumstances, non-trading equity Instead, an entity always accounts for expected credit instruments can be irrevocably designated as FVOCI losses and changes in those expected credit losses. but both unrealised and realised gains or losses are The amount of the expected credit losses should be recognised in reserves and no amounts other than updated at each reporting date to reflect changes in dividends received are recognised in the Statement credit risk since initial recognition. of profit or loss. Under IFRS 9, the same impairment model is applied All other financial assets will mandatorily be held at to all financial assets, except for financial assets FVTPL. Financial assets may be designated at FVTPL classified or designated as at FVTPL and equity only if doing so eliminates or reduces an accounting securities designated as at FVOCI, which are not mismatch. subject to impairment assessment. The scope of the IFRS 9 expected credit loss impairment model For financial liabilities, most of the pre-existing includes amortized cost financial assets, debt requirements for classification and measurement securities classified as at FVOCI, and off balance sheet previously included in IAS 39 were carried forward loan commitments and financial guarantees which unchanged into IFRS 9 other than the provisions were previously provided for under IAS 37 Provisions, relating to the recognition of changes in own credit Contingent Liabilities and Contingent Assets (IAS risk for financial liabilities designated at fair value 37). The above-mentioned reclassifications into through profit or loss, as permitted by IFRS 9. or out of these categories under IFRS 9 and items that previously fell under the IAS 37 framework were Where the contractual terms of financial assets are considered in determining the scope of our application modified, and that modification does not result in de- of the new expected credit loss impairment model. recognition, a modification gain or loss is recognised in the Statement of profit or loss and the gross carrying IFRS 9 also extends the measurement of impairment amount of the asset adjusted accordingly. allowances on financial guarantees, letters of credit, and commitments (including undrawn lines of credit). Transition impact of Phase 1 on the Bank The Bank uses the credit conversion factors as per The Directors have assessed the business models the Basel II Accord to convert any off-balance sheet that it operates across the Bank. In its assessment, exposure to on-balance sheet and thereafter stage the the Directors considered the objectives of the exposure at default in determination of the expected business model, how performance is measured and credit loss. how staff are remunerated amongst other factors. Where the objective of a business is to manage Transition impact of Phase 2 on the Bank financial assets on a fair value basis, the instruments The Bank primarily uses models that utilise the within that business model are measured at FVTPL. probability of default (PD), loss given default (LGD) This includes the Bank’s trading portfolios. The total and exposure at default (EAD) metrics, discounted impact of IFRS 9 in terms of provisions is Ugx 6.8bn. using the effective interest rate. Most of the Bank’s loans to banks and customers are held within a ‘hold to collect’ business model. Expected credit losses are recognised for all financial debt instruments, loan commitments and financial Investment debt securities held with Treasury Markets guarantees that are classified as ‘hold to collect’/‘hold are held within a ‘hold to trade and sell’ portfolio. The to collect and sell’ and have cash flows that are solely majority of the remaining investment debt securities payments of principal and interest. Expected credit are held within a ‘hold to sell’ business model. losses are not recognised for equity instruments designated at FVOCI. Instruments (including hybrid financial assets) that do not meet the SPPI criteria are measured at FVTPL Measurement of Expected Credit Losses regardless of the business model in which they are ECLs are measured as the probability-weighted held. Non-trading equity investments are measured present value of expected cash shortfalls over the at FVTPL except for a small portfolio of strategic remaining expected life of the financial instrument.

Annual Report and Consolidated Financial Statements 96 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS loans on watch list, classification as higher credit risk or where principal and/or interest payments are 30 due. past days or more An asset is only lifetime expected considered credit losses recognised, if there credit is impaired, and observed objective evidence of impairment. factors These are similar evidence to of impairment under IAS 39. This the includes, indicators experiencing default, in assets factors, other amongst of objective to forbearance or subject difficulty financial significant 3 assets’). (so-called ‘stage actions credit-impaired The definition of default is aligned todefinition the regulatory withinClassification and Financial Provisioning) Regulations,or days 90 is asset an when occur to considered and 2005 Instrumentsof principal contractual payments due on past more (Credit without pay to unlikely considered is or interest and/or of any collateral held. realisation To the extent that the assets point of are initial credit-impaired as recognition, at they purchased are or classified expected credit loss allowance is recognised at initial originated credit-impaired. recognition. Any changes in lifetime expected losses An to charged or credited are after initial recognition the Statement of profit or loss through ‘Impairment charges’. The measurement of expected credit losses across all stages is required probability to weighted reflect amount that an is unbiased determined evaluating by a and range of reasonably possible outcomes information about and supportable using reasonable future of forecasts and conditions current events, past economic conditions. non-linearity in credit account for the potential To losses, multiple possible incorporated into the range of reasonably forward-looking outcomes scenarios for all material portfolios. The Bank uses a are approaches among other forecasting linear regression to simulate a various scenarios around to incorporate the potential non-linearity. forecast the central The period considered when measuring credit loss is the shorter expected of the expected life and the contractual term of the financial asset. The expected life may be impacted by prepayments and the maximum contractual portfolios, the expected options. For certain revolving term by extension life is assessed over of length the on the based is (which risk credit to period exposed that the Group rather withdrawn) is be to facilities credit for takes it time than the contractual term. For stage 3, financial assets,lifetime the expected determination credit losses of will be similar to the Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 When one or more events that have a detrimental a have that events more or one When impact on the estimated future cash flows of a financial the assetfinancial have asset occurred, and is migrated credit-impaired is considered to Stage 3, and an allowance equal the to or recorded be to continues lifetime losses expected financial asset is written off. Stage 2 - When there is a significantin credit risk increase since initial recognition, these non- impaired financial instruments are migrated to Stage 2, and a loss allowance that is measured, at each reporting date, at an amount equal lifetime to expected credit losses is of risk credit the if periods, recorded. reporting subsequent In there that such improves instrument financial the is no longer a significant increase creditin risk since initial recognition, the ECL model requires reverting to recognition of 12-month expected credit losses based on curing of loans; and the Bank`s policy on Stage 1 - If, at the reporting date, the credit risk of non-impaired financial instruments has increased not significantly since initial Stage in classified are instruments financial recognition, these each at measured, is that allowance loss a and 1, reporting date, at an amount equal to 12-month losses is recorded; expected credit 97 ‚ ‚ ‚ ‚ ‚ ‚ An ECL allowance is recognised at the time of initial recognition for all financial instruments that are in the scope of ECL in respect of default events that may occur over the next 12 months (so-called assets’ ‘stage 1 with allowances equivalent losses). expected credit to 12-months ECL continues to be determined on this basis until there is either a significant(“SICR”) increase or the credit asset in risk becomes a credit financial impaired. asset If (orexperiences an SICR since initial recognition, an ECL portfolio of financialallowance is recognised assets) for default events that may occur over the lifetime of the asset (so-called ‘stage 2 assets’ with loss allowances equivalent to lifetime expected credit losses). occurring default a of risk SICR the in increase an of context is assessed in when instrument financial the of the life remaining the over compared with that expected at the recognition for the same period. time It is not assessed in of initial loss. credit expected the in increase an of context the quantitative and qualitative of number a uses Bank The measures in assessing SICR. Quantitative measures relate to the relative and lifetime absolute PD changes compared with in those expected the at initial recognition. Qualitative factors include placement of The ECL model contains a three-stage approach that approach contains a three-stage The ECL model of assets quality credit the change in the is based on recognition. since initial IAS 39 approach; for example, loan loss allowances apply hedge accounting. on individually impaired loans and advances will be based on the present value of estimated future cash The work on macro hedging by the IASB is still at a flows for those individual clients. preliminary stage – a discussion paper was issued in April 2014 to gather preliminary views and direction Modifications for other reasons are accounted for in from constituents with a comment period which ended a similar way, except the modification gain or loss will in October 2014. The project is still under analysis at be reported as part of income. For assets measured the IASB as at the time of writing this disclosure. at amortised cost, the balance sheet amount reflects the gross asset less the allowance for ECL. Other disclosures; i. Implementation costs For debt instruments held at FVOCI, the balance sheet amount reflects the instrument’s fair value, with The Bank hired subject matter experts with the specific the expected credit loss allowance held as a separate role of guiding and upskilling the finance function. The reserve within other comprehensive income. external costs of implementation, amount to Ushs 128mn. ECL allowances on off-balance sheet instruments are held as liability provisions to the extent that the drawn ii. Expected impairment (as an absolute amount and undrawn components of loan exposures can be or percentage) separately identified. Otherwise they will be reported The Bank is yet to complete its detailed quantitative against the drawn component. impact assessment of the expected impairment amount. The un-audited quantitative impact Recognition of Interest income assessment as at 31 December 2017 totalled to a Interest income is calculated on the gross carrying decrease in the provision of approximately 12%. amount of the financial assets in Stages 1 and 2 and on the net carrying amount (net of provisions) for the iii. If the Bank will adopt the restatement or no financial assets in Stage 3. restatement The bank will take advantage of the exemption Phase 3: Hedge accounting allowing it not to restate comparative information The general hedge accounting requirements of for prior periods with respect to classification and IFRS 9 retain the three types of hedge accounting measurement including impairment changes. mechanisms in IAS 39.However, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening iv. Impact on the Core Capital as at January 1, the types of instruments that qualify as hedging 2018 instruments and the types of risk components of non- Based on the un-audited quantitative impact financial items that are eligible for hedge accounting. assessment as at 31 December 2017, the impact to The IFRS 9 Hedge accounting requirements will not the Core Capital is as follows; have any significant impact as the bank does not

Annual Report and Consolidated Financial Statements 98 For the year ended 31 December 2017 OVERVIEW GOVERNANCE FINANCIAL STATEMENTS 0.20% 0.20% IFRS 9 548,866 2,136,072 4,118,318 6,803,256 % change (Un-audited) 18.42% 19.79% FIA 2004 7,317,579 3,644,890 3,672,689 Anticipated - - - IAS 39 18.22% 19.59% Previous (Audited) 7,707,183 4,120,962 3,586,221 Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Challenges faced MI & Reporting Policies Models Processes Data & systems People Assessment of core capital after taking into account both the transition and impairment effects of articulated in the Strategic Plan. growth to foster the IFRS 9 and if it is sufficient loss provisions 9 vis-à-vis IAS 39 and FIA 2004 loan Comparison of IFRS

99 As at 31 December 2017 As at 31 December Tier I Tier II Stage 2 Stage 3 TOTAL Specific General Stage 1 ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ ‚ Updating current policies in order to capture the requirements of the Standard. the requirements to capture policies in order Updating current to the Bank. sophisticated impairment model that is most relevant Developing advanced and more Increase in personnel /upskill current personnel with intricate understanding of the requirements of the Standard. the of requirements the of understanding intricate with personnel current /upskill personnel in Increase 9. IFRS of requirements the for cater to able be to order in place in processes current the of revise and Review Updating of the current processes in order to ensure that strong control environment is still maintained for a stable IFRS 9 model deployment. at a granular level. requirements to the detailed and specific historical data regard Significant challenge in v. Management buffers’current of are respect withthe to view thethat Capital Core the adequacyBank’s ratios implementation of the Standard. for any deterioration caused by the as sufficient to cater vi. Amendment of the Management Information and reporting based on the requirements of IFRS 9. on the requirements based Amendment of the Management Information and reporting i. The challenges faced include; Annual Report and Consolidated Financial Statements 100 For the year ended 31 December 2017 Aordable simple BUSINESS and straihtorard CURRENT ACCOUNT banin

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